In a recent address to Japan's leading business federation, Keidanren, Bank of Japan (BoJ) Governor Kazuo Ueda explained the central bank's decision to raise interest rates and outlined a crucial long-term vision: building an economy where wages and prices rise together in a sustainable cycle.
Why the Bank of Japan Raised Interest Rates
Governor Ueda confirmed that the BoJ raised its policy interest rate from around 0.5% to 0.75% in December 2025. This decision was based on a growing confidence in Japan's economic resilience and a clearer path toward its 2% inflation target.
Reduced Overseas Risks: While U.S. tariff policies had created uncertainty, the BoJ now judges that their negative impact, particularly on corporate profits, is contained and not spreading to broader business investment or employment in Japan. U.S. private consumption and AI-related investment have also remained solid, easing global economic concerns.
Strong Momentum for Wage Growth: With the labor market remaining tight, companies across various sizes and regions are continuing to raise wages. Information gathered by the BoJ suggests this trend is set to continue into next year's key spring wage negotiations, with little risk of interruption.
Steady Progress on Inflation: Underlying consumer price inflation has been rising moderately as companies increasingly pass on higher labor costs to selling prices. The BoJ believes the likelihood is rising that inflation will sustainably meet its 2% target from late 2026 through 2027.
The central bank signaled that if this positive scenario holds, it will continue to gradually raise interest rates to support the economy's long-term health.
The "Virtuous Cycle": The BoJ's Ultimate Goal
Governor Ueda dedicated a significant portion of his speech to describing the "economy in which both wages and prices rise moderately" that the BoJ aims to foster.
The mechanism, as illustrated by the BoJ, is a virtuous cycle that starts with corporate profits:
Strong profits lead to increased business investment and higher wages.
Higher wages boost household income and private consumption.
This rise in demand allows for moderate price increases, which in turn supports corporate profits.
This cycle then repeats, sustaining growth. For real, lasting prosperity, this cycle must be supported by gains in labor productivity from corporate investment.
Japan's Economy: How Far Has It Come?
The speech highlighted that Japan has made significant progress toward breaking free from its deflationary past.
Corporate profits have approximately doubled over the past decade.
After years of stagnation, wages are now under strong upward pressure due to a tight labor market shaped by a declining working-age population.
The risk of Japan returning to a state where "wages and prices hardly change" is seen as considerably lower.
However, challenges remain. While wages and investment are growing, their increases have been moderate compared to the substantial rise in corporate profits. This is reflected in a gradual decline in labor's share of national income.
A Call to Action for Japan's Businesses
Looking ahead, Governor Ueda emphasized that Japan is entering a critical phase. To secure long-term growth, he called on businesses to take proactive steps:
Invest in People: The Governor praised the broadening wage increases and encouraged firms to continue this momentum to fundamentally change how workers form expectations about their future earnings.
Invest for the Future: With profits high, the Governor urged companies to be more forward-looking in their business fixed investment. By investing in technology, innovation, and new markets, firms can boost productivity, which is the ultimate foundation for sustainable real wage growth and national prosperity.
In summary, the BoJ's rate hike is not just a response to current data but a step toward nurturing a new, stable economic era for Japan—one built on a healthy interplay between corporate health, worker pay, and steady prices. The central bank views proactive business investment as the essential fuel for this next chapter of growth.
