The Bank of Japan on Thursday struck an increasingly confident tone on the state of the economy, saying regional conditions were improving gradually and that many companies see the need to keep raising wages.
This is seen as a key signal that the central bank believes the foundations for further interest rate hikes are steadily falling into place.
In its quarterly assessment based on reports from regional branch managers, the BOJ maintained its economic view for all nine regions, unchanged from three months earlier, describing them as either “picking up” or “recovering gradually.” The findings reinforce the bank’s view that Japan is moving closer to a durable cycle of rising wages and prices, even as external risks mount.
At the same time, central bank officials cautioned that escalating tensions with China could become a new drag on Japan’s still-fragile recovery, particularly given the deep supply chain ties between the two economies. While the impact has so far been limited, some executives warned it could begin to spread across industries.
“We haven’t heard of any severe damage so far. But a wide range of manufacturers and non-manufacturers say the impact could appear ahead,” said Hiroshi Kamiguchi, head of the BOJ’s Nagoya branch, which oversees a region anchored by Toyota and its extensive supplier network. He added that some firms were increasingly wary of China’s export restrictions and how they might ripple through production and procurement.
Kamiguchi also warned that excessively volatile moves in the yen could hurt business sentiment and economic activity, echoing concerns within the BOJ that currency weakness can fuel import-driven inflation while squeezing households and smaller firms.
Overall, however, the tone of the regional survey was one of cautious optimism. The BOJ said many companies plan to raise wages in the 2026 fiscal year at roughly the same pace as in 2025, reflecting robust corporate profits and a persistently tight labor market. This continuity in wage-setting is particularly significant for policymakers, who have long argued that sustained pay growth is essential for normalizing monetary policy after decades of ultra-loose conditions.
The survey also showed that firms across many regions continue to pass higher costs onto consumers. Companies cited rising input prices, labor costs, and distribution expenses, with some noting they were considering further price hikes to reflect the impact of the yen’s recent declines. This suggests inflationary pressures remain embedded in the economy, even as global growth slows.
The assessment underlines the BOJ’s growing confidence that Japan can withstand headwinds from higher U.S. tariffs. While some regions reported weaker exports and output due to tariff effects and tougher competition from Asian rivals, others pointed to solid demand, particularly for artificial intelligence-related products, which is helping support factory orders and investment.
“While some regions said exports and output were weakening due to the impact of U.S. tariffs and intensifying competition from Asian companies, others said firms were enjoying solid orders reflecting increasing global demand mainly for AI-related goods,” the BOJ said in its summary.
Developments in China remain a key area of watch. Several regions reported that restrictions on travel to Japan following diplomatic tensions had so far had only a limited impact on domestic demand. Kazuhiro Masaki, head of the BOJ’s Osaka branch, said some hotels and retailers had seen sales decline due to fewer Chinese group tourists, but that the shortfall was largely offset by steady inflows from other countries. Still, some firms fear the negative effects could widen if tensions persist.
The regional reports will feed directly into the BOJ board’s review of its quarterly growth and inflation outlook at its next policy meeting on January 22–23. Many analysts expect the central bank to keep rates unchanged this month, but the underlying message from the regions supports the case for further tightening later this year.
The BOJ recently raised its policy rate to 0.75% from 0.5%, the highest level in three decades, marking another step away from years of extraordinary monetary support. Even after that move, real interest rates remain deeply negative, with consumer inflation having exceeded the BOJ’s 2% target for nearly four years.
Minutes from the BOJ’s December meeting showed some board members growing uneasy about the inflationary effects of a weak yen, which raises the cost of imports and weighs on household purchasing power. Masaki said companies in western Japan appeared to be taking higher borrowing costs in stride, seeing them as a natural consequence of sustained wage gains and rising prices.
“The situation has changed dramatically from the time Japan was suffering from deflation, and had seen wages or prices barely rise,” he said.
However, the BOJ’s challenge now is balancing its increasing confidence in domestic momentum with mounting geopolitical and external risks. While the recovery appears to be broadening, officials are acutely aware that shocks from China, currency markets, or global trade could still test Japan’s long-awaited exit from its era of ultra-loose monetary policy.
