I. Economic Activity and Prices
A. Economic Developments at Home and Abroad
Please allow me first to express my deepest sympathy for the loss of life in the large-scale
fire that occurred in Saganoseki, Oita City and to offer my sincere condolences to all those
affected.
I will begin my speech by talking about recent economic developments at home and abroad.
It can be said that Japan's economy is currently in a transitional period, where the economy
is shifting from a deflationary or zero-inflation economy that lasted for several decades from
the collapse of the bubble economy in the early 1990s until the onset of the COVID-19
pandemic, to an economy that grows while both prices and wages continue to rise. In this
context, new developments that have not been seen before are starting to emerge in the
economy,such as progress in wage hikes on the back of labor shortages owing to an expansion
in employment, rising stock prices based on an increase in corporate profits, and growth in
new businesses fueled by diversified business opportunities. On the other hand, high prices
stemming from cost-push factors that emerged with the end of the pandemic have placed a
heavy burden on households, thereby pushing down private consumption. Therefore, for
Japan's economy to genuinely return to a growth path, it is essential that people's wages and
income continue to grow in a way that exceeds price increases.
The pandemic that first broke out in 2020, and subsequent global inflation, posed a significant
challenge for Japan. At the same time, they ultimately played a role in strongly pushing the
country to exit from a zero-inflation economy. The greatest challenge Japan currently faces
is the tariff policy of the second Trump administration in the United States. While the impact
of that policy is not yet fully clear, it is first necessary for Japan's economy to weather this
challenge so that it can return to a growth path.
The new tariff policy unveiled by the Trump administration starting in early spring 2025
caused great concern around the world. This was because it virtually overturned the long-held
principle of free trade -- the idea that more open trade fosters greater prosperity for people.
In the long term, tariffs impair the international division of labor based on comparative
advantage, thereby reducing global production efficiency. In the short term, tariffs lead to a
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contraction in trade, thereby pushing down the economy of many countries and regions. On
top of thisimpact, in the case of the United States, higher imported goods prices due to tariffs,
and the consequent decline in consumption, would likely cause even greater economic
deterioration.
Following the announcement of the new U.S. tariff policy, international organizations,
including the International Monetary Fund (IMF), initially revised their growth projections
for the global economy substantially downward, particularly for the United States. However,
these organizations have gradually revised their subsequent projections upward (Chart 1).
One reason behind these revisions is that, so far, the downward effects of tariffs on the U.S.
economy have remained smaller than initially expected.
The main factor behind the lower-than-expected impact on the U.S. economy is the extremely
slow pass-through of tariffs to selling prices. For example, many automakers have lowered
their export prices to avoid an increase in selling prices in the United States -- meaning that
the exporting side has absorbed the tariff costs. However, such cases have been mostly limited
to automobiles, and for many other items, tariff costs have been borne by the United States,
the importing side. Even in that case, a substantial portion of the costs has been borne by
firms rather than households.1 This is likely due to many U.S. firms intentionally passing on
tariff costs to selling prices slowly, perhaps to avoid drawing attention to the burden on
consumers as much as possible. While it is expected that the pass-through of tariffs to selling
prices will gradually progress, shifting the burden from firms to households, this process will
likely take considerable time. This means that price rises due to tariffs will progress with a
significant time lag in the United States, and consequently downward pressure on
consumption will also occur later than initially expected.
Another factor that has supported the U.S. economy is a rise in growth expectations driven
by the AI sector. This has likely contributed significantly to the continued rise in U.S. stock
prices despite tariffs exerting downward pressure on economic conditions. While private
1 At a press conference held on September 17, 2025, Federal Reserve Chair Powell stated that what
seems to be happening is that tariffs are mostly not being paid by exporters but by the companies that
sit between the exporter and the consumer.
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consumption in the United States has indicated firmness even amid price rises due to tariffs,
it is considered that high stock prices led by the AI sector have partly boosted consumption,
particularly among the wealthy. In fact, resilient AI-related investment has played an
important role in underpinning U.S. economic growth.
As I have described, the U.S. economy has been firm despite developments in tariff policy,
and the global economy has also shown no change on the whole. Japan's economy therefore
has maintained stability. While weakness has been seen in domestic demand due to price rises,
the annualized quarter-on-quarter real GDP growth rate continued to grow moderately
through the April-June quarter of 2025. For the July-September quarter, however, it registered
negative growth for the first time in six quarters, due to factors such as a drop in automobile
exports from Japan to the United States as well as a decline in housing investment against the
background of revisions to the Building Standards Act and the Energy Saving Act (Chart 2).
It is necessary to carefully monitor to what extent these components recover.
B. Price Developments
Turning to domestic price developments, the year-on-year rate of change in the consumer
price index (CPI) has continued to exceed the target of 2 percent since spring 2022, following
the global inflation that arose after the pandemic (Chart 3). That said, factors contributing to
this inflation have varied somewhat, depending on the period. Initially, against the backdrop
of a rapid rise in import prices, higher energy and food prices accounted for a particularly
sizable contribution to the inflation (Chart 4). After that, the rate of increase in import prices
became moderate, in line with subsiding global inflation, and the pace of increase in energy
and food prices started to stabilize. As a result, the year-on-year rate of increase in the CPI
declined to the range of 2.0-2.5 percent around the middle of 2024. However, the CPI inflation
rate has since accelerated again, primarily due to the rise in food prices, especially rice prices.
One of the causes of the higher inflation is the rise in the price of imported beverages and
foods, mainly due to developments in international commodity prices for food. Another factor
contributing to the rise in CPI inflation is the price hikes of rice resulting from supply
shortages that began in 2024 (Chart 5).
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Such a rise in food prices can naturally be attributed to the increasing cost of imported food
and other items. Although the direct trigger of the rise in rice prices is supply shortages, the
underlying cause can also be considered to be an increase in production costs, due to a surge
in the price of materials such as fertilizer, fuel, and agricultural machinery. The pass-through
of these cost increases to prices is beginning to become increasingly evident in a number of
areas. As I will discuss later, this may be understood as a trend to recover all at once the cost
increases that have been accumulated to date, as the "zero norm" -- the widespread belief that
prices do not rise -- dissipates.
II. Monetary Policy
A. Policy Interest Rate Adjustments
Next, I will discuss the Bank of Japan's policy conduct. Judging that the probability of
achieving the price stability target of 2 percent in a sustainable and stable manner had become
sufficiently high, the Bank decided, at the Monetary Policy Meeting (MPM) held in March
2024, to change its large-scale monetary easing framework and shift back to a conventional
policy framework, in which the degree of monetary accommodation is adjusted by guiding
the money market rate as the policy interest rate. Subsequently, the Bank raised the target
level of the money market rate from 0.1 percent to 0.25 percent in July 2024, followed by a
hike to 0.5 percent in January 2025.
After the January 2025 MPM, and through to the most recent October MPM, the Bank
decided to maintain the guideline for money market operations. The main reason for this is
that it was necessary for the Bank to carefully examine the effects of U.S. tariff policy, which
had started to become clear in April. That said, as I mentioned earlier, the impact of U.S.
tariffs has been limited so far. While there is a possibility that progress in the pass-through of
tariffs to prices could result in stronger downward effects on the economy, the general view
at this point is that these effects are unlikely to be very severe. This means that the Bank will
return to its basic policy stance first presented in March 2024, that is, if economic activity
and prices develop in line with the Bank's outlook, the Bank will gradually adjust the degree
of monetary accommodation. I will elaborate on the specifics of how monetary policy should
be conducted and the underlying rationale later.
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B. Balance-Sheet Adjustments
With a view to restoring the functioning of the Japanese government bond (JGB) market,
which had declined under the large-scale monetary easing policy, the Bank decided at the
July 2024 MPM on a plan for the reduction in its JGB purchases for the period until March
2026. Specifically, this plan involves reducing the planned amount of monthly purchases of
JGBs by about 400 billion yen each calendar quarter, in principle. At the June 2025 MPM,
the Bank conducted an interim assessment of the plan. It made a decision to maintain the plan
and also decided on a new plan for the period from April 2026 until March 2027, to reduce
the planned amount of its monthly purchases of JGBs by about 200 billion yen each calendar
quarter, in principle (Chart 6). If the Bank reduces its purchases in line with these plans, the
amount of monthly JGB purchases will decline to about 2.1 trillion yen in January 2027.
Moreover, with JGB redemptions at maturity outpacing the Bank's purchases, the amount
outstanding of its JGB holdings is projected to see a roughly 16-17 percent decrease in March
2027 compared to the amount in June 2024, before the start of the reduction in JGB purchases.
At the June 2026 MPM, the Bank is scheduled to conduct another interim assessment of the
reduction plan, covering the period until March 2027. It will also discuss a guideline for its
JGB purchases from April 2027 and announce the results.
At the September 2025 MPM, the Bank decided on a guideline for selling its holdings of
exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) to the
respective markets. Specifically, the guideline sets out that the Bank will sell ETFs at a pace
of about 330 billion yen per year and J-REITs at a pace of about 5 billion yen per year, both
based on prices formed in the markets. As part of the large-scale monetary easing policy
introduced in April 2013, the Bank had been conducting ETF and J-REIT purchases for the
purpose of making financial conditions even more accommodative by encouraging a
reduction in the risk premiums of asset prices. At the March 2024 MPM, the Bank decided to
discontinue purchases of ETFs and J-REITs, as the achievement of its price stability target
was in sight. That said, the details of the disposal of these assets were to be determined upon
subsequent considerations by the Bank. The decisions made at the September MPM were
based on the results of these considerations.
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