The Bank of Japan (BOJ) stated on Thursday that regional economies in Japan are showing a mild recovery, with the majority of companies deeming it necessary to continue raising wages in the fiscal year 2026. This indicates official confidence in the economic outlook and provides policy space for further interest rate hikes.
According to Reuters, the Bank of Japan held a meeting of branch managers from various regions on the same day, maintaining its unchanged economic assessment for the nine major regions nationwide. They believe that the economic conditions in each region are “continuing to improve or gradually recover” compared to three months ago. This judgement suggests that the Japanese economy is forming a virtuous cycle of simultaneous increase in wages and prices.
The Bank of Japan summarized the results of surveys conducted by various branch offices, stating that with high corporate profits and a continuously tight labor market, most companies expect wage increases in the fiscal year 2026 to be roughly similar to those in 2025.
However, the report also pointed out that some small businesses in certain areas expressed concerns about their ability to raise wages. They worry that under cost pressures, it may be difficult to maintain the same wage adjustment magnitude as this year in the fiscal year 2026.
Nevertheless, most companies in various regions continue to raise prices to offset the impact of rising raw material, labor, and logistics costs. Some companies are even considering further price increases due to the recent depreciation of the yen, which brings additional costs.
The latest assessment by the Bank of Japan shows increased confidence in Japan’s ability to withstand the impact of the United States raising tariffs and believes that the trend of rising wages and expanding inflation is sufficient to support further tightening of monetary policy.
The report indicated that despite some regions reporting the impact of U.S. tariffs on exports and output, coupled with intensified competition from Asian companies, other regions stated that the global demand driven by artificial intelligence (AI) products has kept business orders strong.
In addition, reports from local branches showed that after the controversy surrounding Taiwanese Naoko Takamatsu’s comments on Okinawa, China’s restrictions on travel to Japan have had limited overall impact on domestic demand in Japan. However, some companies are concerned that the negative effects may escalate, and further developments need to be observed.
The Bank of Japan will integrate information from regional branches and discuss the latest quarterly economic growth and inflation outlook at the policy meeting on January 22nd to 23rd. Most market analysts expect the central bank to temporarily maintain interest rates unchanged this month.
Last month, the Bank of Japan raised its policy rate from 0.5% to 0.75%, marking a new high in 30 years and signaling an important step towards gradually ending its long-standing ultra-loose monetary policy. However, despite the inflation rate being above the Bank’s 2% target for nearly four years, Japan’s real borrowing costs remain deeply negative.
Minutes from the December meeting of the central bank showed that some policy board members expressed concerns about the weakening yen pushing up import costs and further exacerbating inflationary pressures, indicating that the future policy direction still needs to cautiously balance inflation risks and economic support.