Junko Nakagawa: Economic activity, prices, and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2025-11-10

Bank

of

JapanNovember 10, 2025

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting of the Okayama Club

## NAKAGAWA JunkoMember of the Policy Board

## IntroductionIt is my pleasure to have the opportunity to address the members of the Okayama Club today.

I would like to begin by talking about the current situation of Japan's economic activity and prices and the outlook, and then talk about the Bank of Japan's conduct of monetary policy.

Afterward, I look forward to hearing from you about the situation this region is currently facing, and I would also be grateful to hear your views on the Bank's policies and business operations.

## I.

Current Situation of and Outlook for Economic Activity and Prices A.

Current Economic Developments in JapanThe Bank judges that Japan's economy has recovered moderately, although some weakness has been seen in part.1.

Corporate sectorLet me start with corporate activity.Please take a look at Chart 1.

The Financial Statements Statistics of Corporations by Industry, Quarterly ,

for the April-June quarter of 2025 showed that current profits for all industries increased by 0.2 percent year on year, maintaining high levels at around the historical peak (left panel of Chart 1).

While the current profits of manufacturers decreased by 11.5 percent year on year, those of nonmanufacturers increased by 6.6 percent, reaching high levels at around the historical peak.

The decrease among manufacturers mainly reflects the fact that Japanese automakers have so far responded to U.S. tariff hikes by absorbing a large part of the impact through lowering export prices.

Meanwhile, the increase in the current profits of nonmanufacturers reflects solid performance across a wide range of industries, owing to, for example, demand for services -- including inbound tourism -- and progress in passing on costs to selling prices.A

similar

pattern

is

observed

in

business

sentiment

(right

panel

of

Chart

1).

The

Bank's September 2025 Tankan (Short-Term Economic Survey of Enterprises in Japan) showed that the diffusion index (DI) for business conditions has been at a favorable level for all industries; the

DI

for

nonmanufacturing

in

particular

was

at

a

more

favorable

level.

The

DI

formanufacturing remained on a par with the previous June survey.

This is likely attributable to the fact that the agreement in the Japan-U.S. tariff negotiations reached in July has reduced uncertainties in the outlook, and that the additional tariff rates on Japanese exports were set at

levels

that

would

not

disadvantage

Japanese

exports

vis-à-vis

the

exports

of

other economies.Please turn to Chart 2.

Real exports have remained more or less flat as a trend (left panel of Chart 2).

Since the beginning of 2025, however, they have seen a front-loading due to the tariff hikes and a subsequent reactionary decline.

Data by region indicate that exports to the United

States decreased by 8.0 percent for

the

July-September

quarter from

the

previous quarter due

to, for

example, the

effects on

automobile

exports

from the

suspension

of production lines at some automakers (middle panel of Chart 2).

On the other hand, exports to the NIEs and to ASEAN and some other Asian economies increased, reflecting solid global AI-related demand, in addition to moves firms have taken in view of the possible introduction of U.S. tariffs on semiconductors.Firms have maintained their appetite for fixed investment, despite the impact of U.S. tariff policy on their business performance and uncertainties regarding the outlook (right panel of Chart 2).

Business fixed investment plans in the September 2025 Tankan indicated that the year-on-year rate of increase in investment remained at a relatively high level of 10.3 percent for fiscal 2025 -- marking the same pace of growth as in the September 2024 survey.

This reflects investment demand in digital areas -- including AI -- and for labor saving, as well as strong construction demand

related to, for example, logistics facilities and urban redevelopment.

## 2.

Household sectorNext, I would like to focus on the household sector.With regard to the employment and income situation, please look at Chart 3.

In nominal terms, employee income -- the total amount of wages earned by all employees -- has continued to show a considerable increase (left panel of Chart 3).

Moreover, in recent years, this has been driven more significantly by growth in nominal wages than in the number of employees.

Inreal

terms

based

on

the

consumer

price

index

(CPI), the

year-on-year

rate

of

change

in employee

income

has been

at

around

0

percent, reflecting CPI

inflation.

The

number

of employees has also increased, mainly in the information and communications industry and in the medical, healthcare, and welfare services industry, both of which have faced severe labor shortages.

Wage growth has been driven both by the high wage growth rate agreed in the 2025 annual spring labor-management wage negotiations and by an increase in bonus payments on the back of favorable corporate profits.Private

consumption

has

remained

resilient,

underpinned

by

the

improvement

in

the employment

and

income

situation

(right

panel

of

Chart

3).

That

said,

consumption

of nondurable goods -- such as clothing -- has remained relatively weak, reflecting consumers' increased thriftiness amid a rise in food prices.

Services consumption, which had continued on a moderate uptrend, has recently become more or less flat.

## B.

Current Price Developments in JapanLet me move on to price developments in Japan.

Please refer to Chart 4.Inflation indicators have continued to see high growth, mainly due to the effects of the rise in rice

and

other

food

prices,

in

a

situation

where

more

firms

have

revised

prices

to

reflect increases in, for example, wages and distribution costs (left panel of Chart 4).Let us look at the breakdown of the year-on-year rate of change in the CPI excluding fresh food, energy, and the effects of government policies and other factors listed in the note for the right panel of Chart 4.

The rate of increase in goods prices accelerated significantly after the COVID-19 pandemic, due mainly to higher commodity and import prices.

The rate has once again accelerated since the second half of 2024; this time owing to the effects of the rise in

food

prices.

The

rate

of

increase

in

general

services

prices --which

remained

barely unchanged for a long time -- has also accelerated, led by recent rises in dining-out prices and mobile phone charges, reflecting the pass-through of utility costs, personnel expenses, and other costs.

The rate of change in administered prices has also increased.Under

these

circumstances,

mediumto long-term

inflation

expectations

have

risen moderately on the whole, toward 2 percent.

The rise in such expectations over the past few years has been more pronounced than in the past.

## II.

Outlook for and Risks to Economic Activity and Prices

## A.

Outlook for Firms' and Households' Economic ActivityLet me now turn to the outlook for the economic activity of firms and households in Japan.With regard to overseas economies, there is no change in the envisaged main scenario; that is, the economies are projected to experience a slowdown for a while, due to the impact of U.S.

tariff

hikes,

but then see

a

gradual

acceleration

in

their

growth

rate

and

return

to

a moderate growth path.Corporate profits in Japan, while remaining at high levels, are likely to remain on a declining trend for the time being, mainly in manufacturing, reflecting the effects of a deterioration in export

profitability

due

to

U.S.

tariff

hikes

and

of

the

slowdown

in

overseas

economies.

Corporate profits are subsequently expected to return to an improving trend, supported by a rise

in exports stemming from the recovery in overseas economies and by an increase in private consumption fueled by growth in real wages.Although business fixed investment is likely to be supported by moves to clear order backlogs and by brisk labor-saving investment, its growth momentum is projected to slow temporarily against

the

background

of uncertainties

regarding trade

policies.

Thereafter, however, the growth momentum is likely to increase.

This is because, with reduced uncertainties regarding their earnings outlook, firms are expected to be able to actively undertake forward-looking investment, such as that for capacity expansion to respond to higher demand.

Labor-saving investment, mainly to address labor shortages, will also likely support the growth momentum.The pace of increase in nominal employee income is projected to decelerate somewhat due to the decline in corporate profits.

However, with continuing tight labor market conditions, its

growth

momentum

is

likely

to

increase

to

some

extent

thereafter

in

tandem

with

the recovery in profits.Private consumption is highly likely to remain more or less flat; although consumption is likely to be pushed down by elevated food prices and the slower growth in bonuses reflecting a decline in corporate profits, an increase in scheduled cash earnings -- owing to the results of the 2025 annual spring labor-management wage negotiations and hikes in minimum wages -- is expected to provide some support.

Thereafter, private consumption is projected to return to

a

moderate

increasing

trend,

since

improvement

in

real

employee

income

is

likely

to become pronounced as the pace of price rises moderates.As for the

outlook

for prices,

the

year-on-year

rate

of

increase

in

the

CPI

is

expected

to moderate, as the positive contribution stemming from the rise in rice and other food prices, which has significantly led CPI inflation, dissipates.

The Bank deems that the price rises seen thus far can also be attributed to the shift in the behavior of firms more toward raising wages and prices.

Careful attention is therefore warranted to how such behavior will develop going forward.The

outlook

I

have

outlined

here

factors

in

the projections

that,

for

example,

labor productivity will increase by a certain degree due to labor-saving investment and that the terms

of

trade,

which

reflect

the

prices

of

crude

oil

and

other

goods,

will

head

toward improvement.

## B.

Outlook for Economic Activity and PricesNext, I would like to touch on the price forecasts of the majority of the Policy Board members, decided at the October 2025 Monetary Policy Meeting (MPM) (Chart 5).In terms of the median of the Policy Board members' forecasts, the real GDP growth rate is projected to be 0.7 percent for fiscal 2025, 0.7 percent for fiscal 2026, and 1.0 percent for fiscal

2027.

Comparing

these with the

projections presented

in

the

previous Outlook

for Economic Activity and Prices (Outlook Report), the projected growth rates are more or less unchanged.The year-on-year rate of change in the CPI for all items excluding fresh food is projected to be 2.7 percent for fiscal 2025, 1.8 percent for fiscal 2026, and 2.0 percent for fiscal 2027, alsoin terms of the median of the forecasts.

The projected rates of increase are likewise more or less unchanged from those presented in the previous report.The high CPI growth for fiscal 2025 is due to the factors that I explained earlier (Chart 4).

The year-on-year rate of increase in the CPI is likely to decelerate temporarily as inflationary pressures wane over time.

However, it is likely that the mechanism by which wages and prices rise

moderately

in

interaction

with

each

other

will

be maintained.

Thereafter,

the

rate

of increase in the CPI is expected to accelerate gradually, alongside the rise in medium- to longterm inflation expectations, since it is projected that a sense of labor shortage will grow more acute as the economic growth rate rises.

## C.

Risks to Economic Activity and PricesThere remain high uncertainties regarding this outlook for economic activity and prices.

I will describe three risks that I am paying attention to.The first concerns the outlook for the U.S. economy.

In recent years, U.S. economic growth has been driven by private consumption and business fixed investment by major IT firms, both of which were mainly supported by high stock prices (left panel of Chart 6).

Factors such as corporate dynamism, or the increased entry and exit of firms, the shift of labor to higher-productivity sectors, and the rising number of immigrants have also contributed to economic growth.

While consumer prices have shown a moderate rise recently, the impact of tariff hikes on these prices seems to be limited so far (middle panel of Chart 6).

It is possible that this impact

will

become

more

pronounced

in

prices

and

economic

activity,

and

that significant

workforce

reductions

in

the

government

sector

as

well

as

a

decrease

in

labor supply due to immigration policy will exert downward pressure on economic growth (right panel

of

Chart

6).

Moreover,

attention

should

be

paid

to

the

possibility

of

considerable adjustments

in

asset

prices

and

a

significant

deceleration

in

the

U.S.

economy

if

growth expectations

for

AI-related

investment,

which

has

driven

economic

growth

to

date,

are adjusted.The second risk concerns the impact of trade and other policies in each jurisdiction.

The very recent U.S.-China summit, for example, is viewed as having made positive progress; as Chinaleverages its technological capabilities and competitiveness to expand exports to countries other than the United States, this could depress corporate profits in those countries, exert downward pressure on the global economy, and ultimately affect Japan's economy.

On the other hand, if countries around the world implement expansionary fiscal policies in response to the outcome of tariff negotiations and tariff policies, global economic growth could turn out to be stronger than expected.The third risk concerns the wage- and price-setting behavior of Japanese firms, as well as its impact on economic activity and prices in Japan.

On the one hand, although Japanese firms are likely still in the process of revising prices in response to past price rises, their behavior has been shifting more toward raising wages and prices in the context of economic and price developments so far.

With growing expectations that labor market conditions in Japan will remain tight, wage hikes and the pass-through of higher wages to selling prices could both become

stronger

than

projected.

The

resultant

price

rises

could

then

affect

household sentiment and inflation expectations.

On the other hand, if firms find it difficult to pass on costs to selling prices, mainly due to weakened demand, their profits could face downward pressure.

In response, they might lean more strongly toward cost-cutting, which could, in turn, weaken moves to reflect price rises in wages.

## III.

The Bank's Conduct of Monetary PolicyThus far,

the

Bank

has

maintained

accommodative financial

conditions to firmly

support economic activity and has adjusted the policy interest rate with a view to achieving the price stability target of 2 percent in a sustainable and stable manner.

At present, based on its outlook for Japan's economic activity and prices, the Bank is conducting money market operations in line with the guideline calling for it to encourage the uncollateralized overnight call rate -- its policy interest rate -- to remain at the target level of "around 0.5 percent."The Bank has also proceeded with efforts to reduce the size of its balance sheet.

Since summer 2024, it has been reducing its Japanese government bond (JGB) purchases gradually, so that it can improve the functioning of the JGB markets in a manner that supports stability in the JGB markets, based on the principle that long-term interest rates are to be formed in financial markets (Chart 7).

At the June 2025 MPM, the Bank decided on a new plan for the reductionof its monthly outright purchases of JGBs, so that the purchase amount will be about 2 trillion yen in the January-March quarter of 2027; the amount will be cut down, in principle, by about 400 billion yen each calendar quarter until the January-March quarter of 2026, and by about 200 billion yen each calendar quarter from the April-June quarter of 2026.

The Bank also decided at this meeting to discuss a guideline for its JGB purchases from April 2027 at the June 2026 MPM and announce the results.

At the September 2025 MPM, it decided to sell exchange-traded

funds

(ETFs)

and

Japan

real

estate

investment

trusts

(J-REITs),

at

a respective pace of about 330 billion yen and about 5 billion yen per year on a book value basis, in an effort to avoid inducing destabilizing effects on the financial markets as much as possible (Chart 8).With regard to the future conduct of monetary policy, given the current level of real interest rates shown in Chart 9, if its outlook for economic activity and prices is realized, the Bank will continue to raise the policy interest rate

and adjust the

degree

of

monetary accommodation in response to improvement in economic and price developments.Considering that high uncertainties remain regarding the impact of trade and other policies in each jurisdiction, the Bank will make monetary policy decisions as appropriate by continuing to carefully assess data and information that becomes available.Thank you.

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting of the Okayama ClubNovember 10, 2025NAKAGAWA Junko Member of the Policy Board Bank of Japan

## Corporate Sector

## Corporate Profitss.a., tril. yen

## Business Conditionss.a., tril. yenNotes: 1.

Figures are based on theFinancial Statements Statistics of Corporations by Industry,2.

Shaded areas denote recession

periods.Quarterly.

Figures exclude the finance and insurance industries and pure holding companies.Source: Ministry of Finance.DI ("favorable" - "unfavorable"), % pointsNotes: 1.

Figures are based on thedata for December

2003 due to a change in the survey framework.Tankan and are for all enterprises.

There is a discontinuity

in the2.

Shaded areas denote recession

periods.Source: Bank of Japan.Chart 1

## Real Exports

## Corporate SectorReal Exports by Regions.a., CY 2020=100s.a., 2020/Q1=100Note: Based on Bank staff calculations.

Figures in angle brackets show the share of each country or region in Japan's total exports

in 2024.

Sources: Ministry of Finance; Bank of Japan.

## Planned and Actual Business Fixed Investment (Nominal)y/y % chg.Notes: 1.

The Tankan figures include software investment

and research and development

(R&D) investment

but exclude land purchasing expenses.

R&D investment

is not included before the March 2017 survey.

Figures are for all industries including financial institutions.- Sources: Cabinet Office; Bank of Japan.2.

The figure for private nonresidential

investment

for fiscal 2025 is that for 2025/Q2.

## Household Sector

## Employee Incomey/y % chg.Figures for 2025/Q3 are those for September.2.

Nominal employee income = Total cash earnings ( Monthly Labour Survey ) Number of employees

( Labour Force Survey )4.

Figures for real employee

income are based on Bank staff calculations using the price indicators shown in parentheses.3.

Figures from 2016/Q1 onward are based on continuing

observations following

the sample revisions

of the Monthly Labour Survey .Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.Chart 3

## Real Private Consumptions.a., cumulative chg. from 2022/Q1, %- Notes: 1.

Based on Bank staff calculations.

Figures for the Consumption

Activity

Index (CAI, travel balance adjusted) exclude inbound tourism consumption

and include outbound tourism consumption.

Figures for 2025/Q3 are July-August averages.3.

Figures in angle brackets show the weights

in the CAI.2.

Nondurable goods include goods classified

as semi-durable

goods in the SNA.Sources: Bank of Japan; etc.

## Inflation Indicators

## Inflation Indicators

## CPI (Less Fresh Food and Energy)y/y % chg.Notes: 1.

Figures for the producer price index (PPI) are adjusted for the hike in electric power charges during the summer season.

Figures for the services producer price index (SPPI) exclude international transportation.y/y % chg.Notes: 1.

Administered

prices (less energy) consist

of public services

and water charges.2.

CPI figures are Bank staff estimates

and exclude the effects

of the consumption

tax hike,2.

Figures for "food" in the CPI exclude alcoholic beverages.Source: Ministry of Internal Affairs and Communications.free education policies,

and travel subsidy programs.Sources: Ministry of Internal Affairs and Communications;

Bank of Japan.Chart 5

## Outlook for Economic Activity and Prices (October 2025)

## Real GDP

## CPI (Less Fresh Food)y/y % chgy/y % chg.Note: Forecasts

presented

are the medians of the Policy Board members'

forecasts.

Sources: Cabinet Office; Ministry of Internal Affairs and Communications;

Bank of Japan.121086420-2-4-6

## Real GDPs.a., ann., q/q % chg.Government expendituresInventory investmentNet exportsResidential investmentPrivate consumptionNonresidential investmentReal GDPIMF projections

## Labor Markets.a., m/m chg., 10 thous. persons%

## U.S. Economy

## Consumer Pricesy/y % chg.CPI (all items)PCE deflator2223242526CY10987654321022232425CYNotes: 1.

In the left panel, IMF projections

are those as of October 2025.Sources: ADP; Bureau of Economic

Analysis;

BLS; IMF.2.

In the right panel, number of employees

refers to nonfarm payroll employment

figures from the Bureau of Labor Statistics

(BLS) and total nonfarm private payroll employment

figures from Automatic Data Processing,

Inc. (ADP).Chart 7

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025 MPM)1.

Long-term interest rates: to be formed in financial markets in principleIn principle, the Bank will reduce the planned amount of its monthly purchases of JGBs each calendar quarter as follows.2.

JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets2. 3.  From April-June 2026 to January-March 2027: about 200 billion yen4.

Until January-March 20265. : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)6.  The Bank will gradually reduce its purchase amount so that it can improve the functioning of the JGB markets in a manner that supports stability in the markets.

## Reduction in a Predictable Manner

## Allowing Enough Flexibility2.

In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases.1.

The Bank will conduct an interim assessment of the plan at the June 2026 MPM.3.

The Bank is prepared to amend the plan at the MPMs, if deemed necessary.

## Decisions on Disposal of ETFs and J-REITs (September 2025 MPM)Fundamental principles for the disposalThe Bank should dispose of its holdings of ETFs and J-REITs for adequate prices, taking into account the condition of the financial markets.Experience of the sales of the "stocks purchased from financial institutions"The Bank should avoid incurring losses as much as possible.The Bank should avoid inducing destabilizing effects on the financial markets as much as possible.The Bank completed in July 2025 the sales of the stocks purchased for financial stability purposes, while avoiding major market impact.1.

The Bank will sell its holdings of ETFs and J-REITs to the market at a scale generally equivalent to that of the sales of the "stocks purchased from financial institutions."2.

A framework supporting the stability in the financial markets will be provided.* The Bank will sell each ETF and J-REIT at the amount approximately proportionate to the share of each asset in its holdings, with consideration to spreading out the timing of the sales.4.  Under the pace of sales described above, the trustee may temporarily adjust the sales amount or suspend the sales, in response to changes in the condition of the financial markets.5.  The pace of sales may be modified at future MPMs, based on the fundamental principles and the experience from the sales to be conducted.3.

The disposal will begin once necessary operational preparations are completed.|

| Stocks (completed)

| ETFs

| J-REITs

||-----------------------------------|-------------------------------------------------------------------------|-----------------------------------------------|---------------------------------------------|| Pace of sales (amount per year) * | Book value (Market value) About 150 billion yen (About 620 billion yen) | About 330 billion yen (About 620 billion yen) | About 5 billion yen (About 5.5 billion yen) || Proportion to the trading value

| About 0.05%

| About 0.05%

| About 0.05%

|

## Financial Conditions

## Real Interest Rates%1-Year10-Year%Note: Figures for real interest

rates are calculated as government

bond yields for the corresponding

maturity minus the composite

index of inflation expectations

(Bank staff estimates).

Sources: Bloomberg;

Consensus

Economics Inc., Consensus Forecasts ; QUICK ,

QUICK Monthly Market Survey ; Bank of Japan.

## Chart 9

## Lending Attitudes of Financial InstitutionsDI ("accommodative" - "severe"), % pointsNote: Figures are based on the Tankan and are for all industries.

There is a discontinuity

in the data for December 2003 due to a change in the survey framework.Source: Bank of Japan.