Bank of Japan Governor Kazuo Ueda said Japan’s underlying inflation is gradually accelerating and moving closer to the central bank’s 2% target, reinforcing the case for further interest rate increases as the country continues its cautious exit from decades of ultra-loose monetary policy.
Speaking on Thursday to Keidanren, Japan’s most influential business lobby, Ueda said the BOJ remains prepared to keep tightening policy as long as economic conditions and price trends evolve in line with its projections. He stressed that the central bank is no longer fighting deflation but is instead focused on ensuring that inflation is sustained by rising wages and corporate pricing power, rather than by temporary cost shocks.
“Given that real interest rates are very low, the BOJ will continue to raise interest rates in accordance with improvements in the economy and prices,” Ueda said, signaling that policy normalization remains a work in progress rather than a one-off adjustment.
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His remarks come just days after the BOJ raised its short-term policy rate to 0.75%, the highest level in roughly three decades. The decision marked another milestone in Japan’s slow dismantling of a monetary framework built on negative or near-zero interest rates, yield curve control and massive asset purchases that were maintained for years to counter entrenched deflation and weak domestic demand.
Ueda said the latest rate increase reflected growing confidence within the BOJ that Japan’s economy can withstand higher borrowing costs, particularly as global headwinds appear to be moderating. He noted that uncertainties linked to U.S. tariff policies and broader trade tensions, which had previously weighed heavily on Japan’s export-driven economy, have eased somewhat, allowing the central bank more room to focus on domestic conditions.
A key pillar of the BOJ’s optimism is the labor market. Ueda said Japan’s labor conditions remain tight and are likely to stay that way unless there is a major economic shock. Structural challenges, including the country’s shrinking and ageing population, have reduced the supply of workers and strengthened employees’ bargaining power, pushing companies to offer higher pay and improved working conditions.
Those pressures, he said, are already feeding through into wage growth and corporate behavior. Large firms agreed to the biggest pay hikes in decades during last year’s annual wage negotiations, and early signals suggest that companies are preparing to maintain similar momentum in the next round of talks. Ueda said sustained wage increases are essential to creating a stable cycle in which higher incomes support consumption, allowing firms to raise prices without eroding demand.
He also highlighted a notable shift in how companies are setting prices. In the past, many firms absorbed higher costs to avoid losing customers, reinforcing Japan’s low-inflation mindset. Ueda said that behavior is changing, with businesses now more willing to pass on rising labor and input costs across a wider range of goods and services, not just food and energy.
“Japan’s underlying inflation has followed a moderate uptrend as a whole,” Ueda said. “Amid tightening labor market conditions, firms’ wage- and price-setting behavior has changed significantly in recent years. Achievement of our 2% inflation target, accompanied by wage increases, is steadily approaching.”
The comments are likely to be closely scrutinized by financial markets, which have been sensitive to any hint about the pace of future rate hikes. At last week’s post-policy meeting briefing, Ueda’s cautious tone was interpreted by some investors as dovish, triggering renewed weakness in the yen. The currency has remained under pressure against the dollar, amplifying concerns about rising import costs and their impact on households.
A persistently weak yen has become a political and economic issue, as it lifts prices for fuel, food and other essentials, squeezing real incomes even as wages rise. While exporters benefit from a cheaper currency, policymakers are increasingly wary that excessive yen depreciation could undermine public support for the BOJ’s policy shift and dampen consumer spending.
Ueda did not directly comment on exchange rate levels but reiterated that policy decisions would be guided by the outlook for inflation and economic activity, rather than short-term market moves. He also emphasized that the BOJ would proceed carefully, adjusting policy step by step to avoid destabilizing the economy or financial system.
Markets widely expect the BOJ to keep rates unchanged at its next policy meeting on January 22–23. Attention will instead focus on the central bank’s updated quarterly forecasts for growth and inflation, which could offer clearer signals on how policymakers view the durability of recent price increases and the likelihood of further rate hikes later in the year.
However, Ueda’s remarks underline a growing confidence within the BOJ that Japan is finally edging closer to a long-sought goal: a self-sustaining cycle of wage growth and inflation that allows monetary policy to return to more normal settings. But risks from global growth, currency volatility and domestic consumption remain firmly on the radar.