Junko Nakagawa: Economic activity, prices, and monetary policy in Japan
Central bank: boj | Type: speech | Date: 2025-08-28

Bank

of J a p a nAugust

28,

2025

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in Yamaguchi

## NAKAGAWA JunkoMember of the Policy Board

## I.

Current Situation of Economic Activity and Prices

## A.

Current Economic Developments AbroadI will first briefly touch on the current situation of overseas economies (Chart 1).

Although tariff negotiations between the Japanese and U.S. governments have resulted in an agreement recently, and

progress

has

been

made

in

negotiations

and

agreements

on

trade

and

other policies in each jurisdiction, there remain many uncertainties in this regard.

With respect to global business sentiment, as of July 2025, the Purchasing Managers' Index (PMI) for the services industry has been clearly above 50 -- the break-even point between improvement and deterioration -- while the PMI for the manufacturing industry has been at around 50.

Let me outline the projected growth rate of the global economy in terms of the weighted averages, which are calculated using countries' share in Japan's exports as weights and the growth rate in the World Economic Outlook (WEO) compiled by the International Monetary Fund (IMF).

Specifically, it is projected that the growth rate for 2025 and 2026 will decelerate to the range of 2.5-3.0 percent, and the rate for 2027 will return to around 3 percent, which is broadly in line with the average growth rate since 1980.

These projections for 2025 and 2026, released in July, have been revised slightly upward from those in April.

## B.

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

In what follows, I would like to explain current developments in Japan's economy from two aspects: the corporate sector and the household sector.

## 1.

Corporate sectorLet me start with the corporate sector (Chart 2).I

would like to start with the Financial Statements Statistics of Corporations by Industry, Quarterly , and consider the latest data for the January-March quarter of 2025.

Current profits for all industries and enterprises, excluding the finance and insurance industries, decreased by 2.6 percent quarter on quarter; however, on a year-on-year basis, current profits for the same quarter increased by 3.8 percent, which is a high level at around the historical peak.

By industry, although current profits of manufacturers decreased by 2.4 percent year on year, they have remained at high levels on the back of the recovery in IT-related demand, mainlyfor AI, and the increase in orders related to business fixed investment.

Meanwhile, current profits

of nonmanufacturers increased

by

7.0

percent

year

on

year, and

this is mainly attributable

to robust demand

for

digital-related

investment, solid

demand

for

services, including inbound tourism demand, and progress in price revisions.As

for

business

fixed

investment, the

aggregate

supply

of

capital

goods --a

coincident indicator of machinery investment -- has been resilient, supported by demand for AI- and labor saving-related investments.

Despite being affected by delays in construction projects due to high construction material prices and labor shortages, private construction completed (nonresidential) --a

coincident

indicator

of

construction

investment --has

increased moderately,

supported

by

strong

construction

demand

related

to,

for

example, logistics facilities and urban redevelopment.Next, I will turn to industrial production and exports (Chart 3).

Industrial production was more or less flat for the April-June quarter.

Automobile production has decreased recently due

to

the

reactionary

decline following

the

increased production

at

some

automakers, although capacity utilization rates have remained high, supported by solid demand at home and abroad.

With robust AI-related demand, such as for data servers, production of electronic parts and devices has increased, induced by front-loading of production in Asia in preparation for the possible introduction of sectoral tariffs on semiconductors by the U.S. government.

I will outline developments in real exports through July, shown in the right panel of Chart 3.

Real exports increased for the January-March quarter, reflecting the front-loading due to tariff hikes.

Since April, they have been close to the historical peak on the whole; although exports of some goods such as automobile parts have decreased in reaction to the prior front-loading, exports of IT-related goods have seen a front-loading.Let me now outline developments in real exports by region and by type of goods (Chart 4).

By region, exports to the United States increased in the January-March quarter by 8.5 percent on

a

quarter-on-quarter

basis,

likely

due

to

the

front-loaded exports

of

goods

such as automobile parts, reflecting tariff hikes.

Thereafter, exports to the United States decreased by 3.3 percent in the April-June quarter on a quarter-on-quarter basis and by 4.9 percent in July relative to the April-June quarter, partly reflecting a reactionary decline following the front-loading.

That said, the level of exports to the United States has been maintained on the back of resilient demand in the country.

Exports to Europe have continued to be relatively weak, reflecting subdued business fixed investment in the region.

Exports to China have remained more or less flat at low levels due to the leveling-off of demand for semiconductor production equipment, as Chinese manufacturers' increased competitiveness has led to a shift to local production.

Exports to the NIEs, ASEAN, and some other Asian economies have increased.

This reflects the

front-loading

of

exports

in

preparation

for

the

possible

introduction

of sectoral

tariffs

on

semiconductors

by

the

U.S. government,

with

solid

global AI-related demand.

Moving on to the right panel of Chart 4, which shows developments in exports by type of goods, exports of automobile-related and IT-related goods have seen a front-loading due to the increase in tariffs, while exports of automobile-related goods have also seen a subsequent reactionary decline.

Exports of capital goods have picked up as a trend, albeit with fluctuations, supported by resilient demand for semiconductor production equipment.

Exports of intermediate goods have been flat at low levels, due to oversupply in Asia.To examine the impact of tariffs on the corporate sector, it will be necessary to assess the latest data.

## 2.

Household sectorI will now turn to the employment and income situation and private consumption.The

employment and

income

situation

has

improved

moderately.

Chart

5

shows

that

the number of employed persons has continued to increase steadily.

As for the number of regular and

non-regular

employees,

the

calendar

year

2019,

the

year

before

the

outbreak

of

the pandemic, is used as the base year.

The number of regular employees has been on a moderate uptrend,

mainly

in

the

information

and

communications

industry

and

in

the

medical, healthcare, and welfare services industry, both of which have faced severe labor shortages.

The number of non-regular employees has been somewhat below the level observed before the pandemic, partly because firms have made a shift from non-regular to regular employment.

On the wage side, nominal wages per employee have continued to increase steadily.

The final aggregate results of the 2025 annual spring labor-management wage negotiations compiled by the Japanese Trade Union Confederation (Rengo) show that the average year-on-year rateof increase in wages for regular employees agreed in the negotiations is 5.3 percent, and that for small and medium-sized firms also stands at 4.7 percent, both following the high levels for 2024 (Chart 6).

In light of the employment and wage developments mentioned so far, employee income -- which is the total amount of wages earned by all employees -- has seen a considerable increase on a year-on-year basis in nominal terms.

In real terms -- based on the consumer price index (CPI) for all items excluding imputed rent -- the year-on-year rate of

increase

in

employee

income has

risen

recently,

after

having decelerated

mainly as

a reflection of the rise in inflation.Let me now outline private consumption (Chart 7).

Despite weakness in consumer sentiment due to the impact of price rises and other factors, private consumption has remained resilient because,

as

noted

earlier,

the

number

of

employees

has increased

and

firms

have

made progress in revising wages to reflect the results of the 2025 annual spring labor-management wage negotiations.

Looking at the Consumption Activity Index (CAI), which is calculated by combining

various

sales

and

supply-side

statistics,

nondurable

goods

consumption

has continued to be relatively weak, reflecting consumers' increased thriftiness due to the rise in the price of food they buy on a daily basis.

Nevertheless, services consumption in particular has seen a moderate increasing trend against the backdrop of the improvement in the income situation.

## C.

Current Price Developments in JapanNext, I would like to talk about current price developments in Japan (Chart 8).Consumer prices have continued to see high growth, mainly due to the effects of the rise in the price of rice and other food items, in a situation where more firms have revised prices to reflect

increases

in,

for

example,

wages

and

distribution

costs.

The

year-on-year

rate

of increase

in

the

CPI

for

all

items

excluding

fresh

food

has

declined to

around

3

percent, because of the earlier decline in commodity prices and a deceleration in the rate of increase in energy prices that reflects government support to alleviate the increased burden of fuel oil prices.

Meanwhile,

despite

downward

pressure

stemming

from

subsidies

for

high

school tuition, the rate of increase in the CPI for all items excluding fresh food and energy has showna slight acceleration, registering 3.4 percent, due mainly to the effects of higher mobile phone charges.The breakdown of the year-on-year rate of change in the CPI for all items excluding fresh food and energy shows that the rate of increase in goods prices has accelerated due to the effects of the rise in the price of rice and other food items.

The rate of increase in general services prices decelerated for some months after the turn of the year due to a dissipation of the upward pressure on prices brought about by the resumption in 2024 of the price survey of charges for package tours to overseas.

Thereafter, however, the rate of increase in general services prices has returned to an uptrend, which shows that dining-out has also been affected by the price pass-through of personnel expenses and other costs and by rising food prices.The year-on-year rate of increase in the producer price index (PPI) has fallen to around 2.5 percent,

mainly

due

to the

effects

of

stabilized

commodity

prices,

the

yen's

appreciation relative to the previous year, and government support to alleviate the increased burden of fuel oil

prices.

The

rate

of

increase

in

the

services

producer

price

index

(SPPI,

excluding international transportation) has marked 3 percent, mainly on the back of the rise in personnel expenses.Let me now consider data on factors affecting the price developments that I have just outlined (Chart 9).

While crude oil prices have decreased, the FAO Food Price Index has risen.

In this situation, the rate of change in the import price index on a yen basis has declined year on year, amid the downward pressure stemming from the price of commodities such as crude oil, coupled with the impact of the yen's appreciation.

Nevertheless, the import price index on a yen basis has been higher than that on a contract currency basis.I will explain the core indicators of the CPI, which the Bank releases regularly (Chart 10).

The left panel of Chart 10 provides some major indicators for capturing the underlying trend in the CPI, which are estimated by the Bank's staff as explained in the footnotes of this chart.

The right panel of the chart shows the share of items in the CPI for all items excluding fresh food, whose prices have increased or decreased from a year earlier.

Turning to Chart 11, the left panel shows the distribution of the year-on-year price changes for items that make up theCPI for all items.

The tails of the distribution have been extended upward, and the simple median has been at around 2 percent.The rate of increase in some of these core indicators has recently slowed, mainly due to a decline in the rate of increase in energy prices, which have a large weight in the CPI.

Yet, with the effects of the rise in food prices, such as rice prices, being observed in a wide range of items from summer 2024, the share of price-increasing items and the rate of increase in the core indicators of the CPI have been on a rising trend.In this situation, medium- to long-term inflation expectations have risen moderately on the whole.

Such expectations have risen more significantly over the past few years than in the past.

The

Bank

deems

that

this

reflects

factors

such

as

the

recent

price

developments mentioned earlier and firms' behavior shifting more toward raising wages and prices.

Future developments in these factors therefore warrant careful attention.

## II.

Outlook for and Risks to Economic Activity and Prices

## A.

Prospects for Firms' and Households' Economic ActivityLet me now turn to the prospects for the economic activity of firms and households in Japan.Exports and industrial production are projected to be negatively affected, for the time being, by

the

reactionary

decline

following

the

front-loading

due

to

the

increase

in

U.S.

tariffs.

Moreover,

they

are

expected

to

show

some

weakness

reflecting

a

slowdown

in

overseas economies.

Thereafter, however, as overseas economies return to a moderate growth path, exports and industrial production are likely to head toward a recovery.Corporate

profits, while

being

at

high

levels,

are

likely

to

turn

to

a

decline,

mainly

in manufacturing, reflecting the effects of the

deterioration in export profitability due to the increase in U.S. tariffs and of the slowdown in overseas economies.

Thereafter, corporate profits

are expected to return to an improving trend due to factors such as an increase in domestic and external demand.As

for

business

fixed

investment,

heightened

uncertainties

over

trade

policies

and

the deterioration in the profit environment could result in a downward revision of investment plans, although labor-saving investment and moves to clear order backlogs are expected to provide some support.

That said,

business fixed

investment is

likely

to

regain its

growth momentum.

This is because, with reduced uncertainties regarding future profits given the agreement on tariff rates between Japan and the United States, firms will be able to actively undertake

forward-looking

investment,

such

as

that

for

capacity

expansion

and

for restructuring supply chains.Nominal employee income is likely to continue to see a steady increase for the time being, reflecting the results of the annual spring labor-management wage negotiations.

Although the pace of increase in income is projected to decelerate temporarily due to a decline in corporate profits, its growth momentum is likely to increase thereafter, in line with a recovery in profits.Private consumption is highly likely to remain more or less flat; although a rise in scheduled cash

earnings

reflecting

the

results

of

the

2025

annual

spring

labor-management

wage negotiations is expected to provide some support, consumption is likely to be pushed down by the rise in food prices in particular.

Thereafter, private consumption is projected to return to a moderate increasing trend, since the improvement in real employee income is likely to become pronounced, as firms revise their wages reflecting higher corporate profits and as the pace of price rises moderates.I will outline the results of the Bank's June 2025 Tankan (Short-Term Economic Survey of Enterprises in Japan) (Chart 12).

The Bank assessed that business sentiment, at the time of the survey, stayed at a favorable level on the whole.

However, the forecast in the Tankan for three months ahead worsened for both manufacturing and nonmanufacturing, marking a 6 percentage

point

deterioration

for

all

industries

and

enterprises.

The

year-on-year

rate

of increase in business fixed investment plans for fiscal 2025 reported in the June Tankan was at a relatively high level of 9.4 percent.

The results of the upcoming September Tankan will also be very important in examining the changes arising from factors such as progress in trade policy negotiations between jurisdictions since the June survey.

## B.

Outlook for Economic Activity and PricesNow, I would like to explain the Bank's outlook for Japan's economic activity and prices, in terms of the forecasts of the majority of the Policy Board members, released after the July 2025 Monetary Policy Meeting (MPM) (Chart 13).The real GDP growth rate is projected to be 0.6 percent for fiscal 2025, 0.7 percent for fiscal 2026, and 1.0 percent for fiscal 2027, in terms of the median of the Policy Board members' forecasts.These real GDP projections are more or less unchanged from those in the April 2025 Outlook for

Economic Activity and Prices (Outlook Report).

Japan's economic growth is likely to moderate temporarily, since it is projected that trade and other policies in each jurisdiction will lead to a slowdown in overseas economies and to heightened uncertainties, and that these will push down Japan's exports and business fixed investment.

Thereafter, Japan's economic growth rate is likely to rise, with overseas economies returning to a moderate growth path.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, in terms of the median of the Policy Board members' forecasts.

Likewise, the rate of change in the CPI for all items excluding fresh food and energy is projected to be 2.8 percent for fiscal 2025, 1.9 percent for fiscal 2026, and 2.0 percent for fiscal 2027.Compared with the previous Outlook Report released in April, the CPI projections for fiscal 2025 saw a relatively large upward revision of 0.5 percentage points, mainly due to the effects of the rise in food prices.

This outlook for prices likely reflects roughly the same factors as the previous Outlook Report, such as the pass-through of higher wages and distribution costs to

selling

prices,

as

well

as

the

effects

of

the earlier

rise

in

rice

prices

being

observed in processed food and dining-out.

The baseline scenario of the outlook for prices is as follows.

Underlying CPI inflation is likely to decelerate temporarily as the inflationary pressures that I just mentioned wane over time and Japan's economy decelerates due mainly to the effects of the trade policy in each jurisdiction.

However, it is likely that the mechanism by which wages and prices rise moderately in interaction with each other will be maintained.

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

In the second half of the projection period of the July Outlook Report, underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target.

## C.

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

I will describe three risks that I am paying attention to.The first risk involves Japanese firms' wage- and price-setting behavior and its impact on economic activity, prices, and inflation expectations.

If firms, in response to tariff policies, have to focus much more on cost cutting over passing on cost increases to selling prices, moves

to

reflect

price

rises

in

wages

could

weaken.

On

the

other

hand,

there

is also

a possibility that upward pressure on wages and the pass-through of higher wages to selling prices

will

strengthen,

and

that

price

rises

will

affect

household

sentiment

and

inflation expectations.

This is because, while it is likely that firms' price revisions in response to past inflation are still in progress, firms' behavior has shifted more toward raising wages and prices, and there has been growing expectation that labor market conditions will remain tight.The second risk concerns the impact of how the rise in supply costs due to trade policies affects economic activity and prices.

Firms around the world may go beyond the price passthrough of the increase in tariff rates and adopt more dynamic pricing policies.

Costs for restructuring

supply

chains

could

also

lead

to

a

rise

in

import

prices

or

to

significant fluctuations in foreign exchange rates and international commodity prices.

If these supply factors cause a substantial rise in prices that outweighs the rise in wages, and households' defensive attitude toward spending consequently strengthens further, this could in turn push down the economy.The third risk is the evolving situation regarding trade and other policies in each jurisdiction and its impact on trade activity and business and household sentiment.

The recent increase in wide-ranging

tariffs

is

expected

to

impact

global

trade

activity,

and

the

heighteneduncertainties regarding trade policies are likely to affect business and household sentiment around the world and global financial and capital markets.

This in turn could push down domestic

and

overseas

economies.

Conversely,

the

U.S.

and

European

economies

in particular could turn out to be stronger than expected, if, in response to the possibilities just mentioned,

their

governments

implement

expansionary

fiscal

policies based

on

their respective economic measures and political decisions.

## III.

The Bank's Conduct of Monetary PolicyI would now like to look back at the Bank's decisions made at the MPMs held in June and July 2025.At the most recent MPM in July, in light of the outlook for Japan's economic activity and prices that I described earlier, the Bank decided to maintain its guideline for money market operations, which stated that it would encourage the uncollateralized overnight call rate -- its policy interest rate -- to remain at the target level of "around 0.5 percent."At the June 2025 MPM, the Bank decided on a new plan for the reduction of its purchase amount of Japanese government bonds (JGBs) (Chart 14).

Specifically, the Bank will reduce the planned amount of its monthly purchases of JGBs so that it will be about 2 trillion yen in January-March 2027; the amount will be cut down, in principle, by about 400 billion yen each calendar

quarter

until

January-March

2026,

and

by

about

200

billion

yen

each

calendar quarter

from

April-June

2026.

The

Bank

also

decided

at

this

meeting

to

carry

out

the following at the June 2026 MPM.

First, it will conduct an interim assessment of the new plan for the reduction in its JGB purchases; in principle, the Bank intends to maintain the reduction plan, while it may modify the plan if deemed necessary after reviewing the developments in and functioning of the JGB markets.

Second, it will discuss a guideline for its JGB purchases from April 2027 and announce the results.With regard to the future conduct of monetary policy, given the current level of real interest rates, shown in the left panel of Chart 15, if its outlook for economic activity and prices is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.Considering that high uncertainties remain regarding the future course of trade and other policies in each jurisdiction and the impact of these policies, the Bank will make monetary policy decisions as appropriate by continuing to carefully assess data and information as it becomes available.Thank you.

## Economic Activity, Prices, and Monetary Policy in JapanSpeech at a Meeting with Local Leaders in YamaguchiAugust 28, 2025

## NAKAGAWA Junko Member of the Policy Board Bank of Japan

## Overseas Economies

## Global PMIs.a., DIChart 1

## Outlooky/y % chg.Note: Figures for manufacturing are the J.P.Morgan Global Manufacturing PMI.- Figures for services

are the J.P.Morgan Global Services PMI Business Activity

Index.

Source: Copyright

© 2025 by S&P Global Market Intelligence,

a division

of S&P Global Inc. All rights reserved.Note: Figures are the weighted

averages of real GDP growth rates using countries'

share in Japan's exports as weights.

The real GDP growth rates are compiled

by the IMF, and the rates from 2025 onward are its projections

in the April 2025 WEO and the July 2025 WEO Update .

Figures for advanced economies are those for the United States, the euro area, and the United Kingdom.

Figures for emerging

and commodity-exporting economies are those for the rest of the world.Sources: IMF; Ministry of Finance.2.

Shaded areas denote recession

periods.

## Corporate Sector in Japan

## Corporate Profits

## Coincident Indicators of Business Fixed Investments.a., ann., tril. yens.a., CY 2020=100Source: Ministry of Finance.Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism.

## Corporate Sector in JapanChart 3

## Industrial Productions.a., CY 2020=100Note: Shaded areas denote recession

periods.

Source: Ministry of Economy,

Trade and Industry.

## Real Exports and Importss.a., CY 2020=100Note: Based on Bank staff calculations.

Figures for 2025/Q3 are those for July.

Sources: Ministry of Finance; Bank of Japan.

## Corporate Sector in Japan

## Real Exports by Region

## Real Exports by Type of Goodss.a., 2020/Q1=100s.a., 2020/Q1=100

## Employment and Income Situation in JapanChart 5

## Number of Employed Personss.a., mil. personss.a., CY 2019=100Note: Figures for regular employees and non-regular employees prior to 2013 are based on the "detailed tabulation" in the Labour Force Survey .- Source: Ministry of Internal Affairs and Communications.

## Nominal Wages per Employeey/y % chg.- Notes: 1.

Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February.

Figures for 2025/Q2 are those for June.- Source: Ministry of Health, Labour and Welfare.2.

Figures from 2016/Q1 onward are based on continuing

observations following the sample revisions.

## Employment and Income Situation in Japan

## Results of Spring Wage Negotiations

## Employee Incometotal wage increase, y/y % chg.|

|

2022 |

2023 |

2024 |

2025 ||------------------------------|--------|--------|--------|--------|| Regular employees

|

2.1 |

3.6 |

5.1 |

5.3 || Large firms

|

2.1 |

3.6 |

5.2 |

5.3 || 1,000 or more

|

2.1 |

3.7 |

5.2 |

5.4 || 300 to 999

|

2

|

3.4 |

5

|

5.1 || Small and medium-sized firms |

2

|

3.2 |

4.5 |

4.7 || 100 to 299

|

2

|

3.3 |

4.6 |

4.8 || 99 or less

|

1.9 |

2.9 |

4

|

4.4 || Part-time employees

|

2.3 |

5.1 |

5.7 |

5.8 || CPI (less fresh food)

|

2.3 |

3.1 |

2.5 |

3.3 |- Notes: 1.

The figures for the breakdown by the number of regular employees

are aggregated values based on the number of union members.

Part-time

employees include fixed-term employees.- Sources: Japanese Trade Union Confederation

(Rengo); Ministry of Internal Affairs and Communications.2.

The CPI figure for 2025 is the January-July average..y/y % chg.- Notes: 1.

Q1 = March-May, Q2 = June-August, Q3 = September-November,

Q4 = December-February.

Figures for 2025/Q2 are those for June.3.

Figures from 2016/Q1 onward are based on continuing

observations following

the sample revisions

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

## Private Consumption in JapanChart 7

## Real Private Consumptions.a., CY 2015=100- Notes: 1.

Figures for consumption

of households exclude imputed rent. 2. "Disposable

income etc." consists

of disposable

income and adjustment for the change in pension

entitlements.

Real values are based on Bank staff calculations using the deflator of consumption

of households.Source: Cabinet Office.

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

Based on Bank staff calculations.

Figures for the CAI (travel balance adjusted) exclude inbound tourism consumption

and include outbound tourism consumption.2.

Nondurable goods include goods classified

as semi-durable

goods in the SNA.- Sources: Bank of Japan; etc.3.

Figures in angle brackets show the weights

in the CAI.

## Inflation Indicators

## Inflation Indicators

## CPI (Excluding Temporary Factors)y/y % chg.- Notes: 1.

Administered

prices consist

of public services

and water charges.2.

The CPI figures are Bank staff estimates

and exclude the effects

of the consumption

tax hike, free education policies,

travel subsidy

programs, and mobile phone charges.y/y % chg.|

| 24/Q4

| 25/Q1

| 25/Q2

| 25/Q3

||----------------------------|---------|---------|---------|---------|| CPI

|

|

|

|

|| Less fresh food

| 2.6

| 3.1

| 3.5

| 3.1

|| Less fresh food and energy | 2.3

| 2.7

| 3.2

| 3.4

|| Less food and energy

| 1.6

| 1.5

| 1.6

| 1.6

|| PPI

| 3.8

| 4.2

| 3.4

| 2.6

|| SPPI

| 3.2

| 3.5

| 3.5

| 3.0

|| GDP deflator

| 2.9

| 3.3

| 3.0

|

|| Domestic demand deflator

| 2.4

| 2.7

| 2.2

|

|- Notes: 1.

Figures for the PPI are adjusted for the hike in electric power charges during the summer season.

Figures for the SPPI exclude international

transportation.3.

Figures for 2025/Q3 are those for July.2.

Figures for "food" in the CPI exclude those for alcoholic beverages.- Sources: Cabinet Office; Ministry of Internal Affairs and Communications;

Bank of Japan.- Source: Ministry of Internal Affairs and Communications.

## Factors Affecting Consumer PricesChart 9

## International Commodity Prices

## Import Price Indexoil: $/bbl, copper: 100 $/t, monthly avg.,Note: The FAO Food Price Index consists

of the price indices

of cereals, vegetable oils, sugar, meat, and dairy products.- Sources: Bloomberg; FAO; Nikkei Inc.y/y % chg.Source: Bank of Japan.CY 2020=100

## Core Indicators of the CPI

## Trimmed Mean etc.

## DI of Price Changesy/y % chg.Notes: 1.

Based on Bank staff calculations using the CPI excluding

the effects

of the consumption

tax hikes, free education policies,

and travel subsidy

programs.

The CPI figures from April 2020 onward are Bank staff estimates

and exclude the effects

of measures such as free higher education.% points%2.

The trimmed mean is calculated by excluding items that belong to a certain percentage

of the upper and lower tails of the price change distribution

(10 percent of each tail) in order to eliminate the effects

of large relative price changes.

The mode is the inflation

rate with the highest

density

in the price change distribution.

The weighted

median is the average of the inflation

rates of the items at around the 50 percentile

point of the cumulative distribution

in terms of weight.Note: The diffusion index (DI) is defined as the share of increasing items minus the share of decreasing items.

The share of increasing/decreasing

items is the share of items for which price indices increased/decreased

from a year earlier.

Based on Bank staff calculations using the CPI (less fresh food) excluding

the effects

of the consumption

tax hikes, free education policies,

and travel subsidy programs.

The CPI figures from April 2020 onward are Bank staff estimates

and exclude the effects

of measures such as free higher education.Sources: Ministry of Internal Affairs and Communications;

Bank of Japan.Sources: Ministry of Internal Affairs and Communications;

Bank of Japan.

## Inflation ExpectationsChart 11

## Distribution of Actual Price Changesy/y % chg.Note: Figures are based on the year-on-year

price changes for each CPI item.

Source: Ministry of Internal Affairs and Communications.

## Survey Results and BEIy/y, ann. avg., %Notes: 1.

Figures for households

are from the Opinion Survey on the General Public's Views and Behavior , estimated

using the modified

Carlson-Parkin method for a 5-choice question.3.

The BEI (break-even inflation)

rate is the quarterly average of the yield spread between

fixed-rate coupon-bearing

JGBs and inflation-indexed

JGBs.

Figures from 2008/Q2 to 2013/Q4 are calculated using yield data for issue No. 16 of inflation-indexed

JGBs, which matured in June 2018.2.

Figures for firms show the inflation outlook of enterprises

for general prices (all industries

and enterprises,

average) in the Tankan .Sources: Bloomberg;

Bank of Japan.

## Business Conditions and Fixed Investment (June 2025 Tankan )

## Business ConditionsDI ("favorable" - "unfavorable"), % pointsNotes: 1.

Based on the Tankan .

All enterprises.

There is a discontinuity

in the data for December

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

## Planned and Actual Business Fixed Investmenty/y % chg.- Notes: 1.

The Tankan figures include investments

in software and research and development

(R&D) but exclude land purchasing expenses.

R&D investment

is not included before the March 2017 survey.

The figures are for all industries

including

financial institutions.2.

Shaded areas denote recession

periods.- Sources: Cabinet Office; Bank of Japan.2.

The figure for private nonresidential

investment

for fiscal 2025 is that for 2025/Q2.Chart 13

## Outlook for Economic Activity and Prices (as of July 2025)y/y % chg.|

| Real GDP

| CPI (all items less fresh food)

| (Reference) CPI (all items less fresh food and energy)

||------------------------------|---------------------|-----------------------------------|----------------------------------------------------------|| Fiscal 2025

| +0.5 to +0.7 [+0.6] | +2.7 to +2.8 [+2.7]

| +2.8 to +3.0 [+2.8]

|| Forecasts made in April 2025 | +0.4 to +0.6 [+0.5] | +2.0 to +2.3 [+2.2]

| +2.2 to +2.4 [+2.3]

|| Fiscal 2026

| +0.7 to +0.9 [+0.7] | +1.6 to +2.0 [+1.8]

| +1.7 to +2.1 [+1.9]

|| Forecasts made in April 2025 | +0.6 to +0.8 [+0.7] | +1.6 to +1.8 [+1.7]

| +1.7 to +2.0 [+1.8]

|| Fiscal 2027

| +0.9 to +1.0 [+1.0] | +1.8 to +2.0 [+2.0]

| +2.0 to +2.1 [+2.0]

|| Forecasts made in April 2025 | +0.8 to +1.0 [+1.0] | +1.8 to +2.0 [+1.9]

| +1.9 to +2.1 [+2.0]

|Note: Figures in brackets indicate the medians

of the Policy Board members' forecasts

(point estimates).

Source: Bank of Japan.

## Plan for the Reduction of the Purchase Amount of JGBs (June 2025)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.  Until January-March 20263. : about 400 billion yen (the reduction plan decided in July 2024 will be maintained)4.  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.5.  From April-June 2026 to January-March 2027: about 200 billion yen

## 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.

## Financial Conditions in JapanChart 15

## Real Interest Rate (1-Year)%Note: Figures for the real interest rate are calculated as government

bond yields (1-year) 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.

## Lending Attitudes of Financial Institutions as Perceived by FirmsDI ("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.