The Bank of Japan said regional economies across the country continue to recover gradually, with firms expecting to press ahead with wage increases into the next fiscal year, reinforcing the central bank’s confidence that Japan is moving toward a more durable growth and inflation cycle. In its latest regional assessment, the BOJ maintained its outlook for all nine regions, noting steady improvements supported by strong corporate profits and a tight labor market. Many companies signaled plans to lift wages in fiscal 2026 at a pace similar to the previous year, suggesting that income growth is becoming more entrenched after decades of stagnation. The assessment strengthens the case that Japan’s economy is adjusting to higher prices and borrowing costs, even as monetary policy remains relatively accommodative by global standards.
While the near term outlook remains constructive, central bank officials flagged rising geopolitical and trade risks tied to China as a potential drag. Firms with close supply chain exposure to China warned that export restrictions and broader tensions could begin to affect business activity more visibly in the months ahead. So far, the impact has been limited, but policymakers cautioned that spillovers could widen given the deep integration between the two economies. Some regions reported weaker exports and output linked to external pressures, though others benefited from solid global demand, particularly for technology and artificial intelligence related goods. Officials also warned that excessive volatility in the yen could undermine business confidence by raising import costs and complicating pricing decisions.
Domestic price dynamics remain a key focus. Regional surveys showed many companies continuing to pass higher input, labor, and logistics costs on to consumers, with some considering further price increases following recent currency weakness. Despite this, firms appear more comfortable operating in an environment of rising prices and wages, reflecting a structural shift away from Japan’s deflationary past. Tourism trends offered a mixed picture, with reduced travel from China weighing on some hotels and retailers, though inflows from other countries helped offset the decline. Overall domestic demand was described as resilient, supporting the view that consumption can withstand moderate policy tightening.
The findings will feed into the BOJ’s upcoming policy review later this month, where most analysts expect rates to be left unchanged. The central bank has already lifted its policy rate to its highest level in three decades, yet real borrowing costs remain deeply negative given persistent inflation above target. Policymakers appear increasingly convinced that Japan can tolerate higher rates as long as wage growth continues and price gains remain orderly. However, external risks, currency swings, and trade frictions could complicate the path forward, keeping the central bank cautious even as confidence in the recovery improves.
