- Real interest rates still significantly negative; policy remains accommodative following December’s hike to 0.75%
- Natural rate of interest estimated between -1% and +0.5%, wide range makes precise policy calibration difficult
- Food price inflation primarily supply-side shock, not demand driven; expects deceleration below 2% in H1 2026
- US economy resilience surprised to upside; AI-related investment spillover benefiting Japanese exporters and subcontractors across regions
- Corporate lending growth accelerating, firms’ funding costs well below returns on assets; no signs of credit stress
- Will continue raising rates in line with economic and price developments; pace contingent on totality of incoming data
The main message is that the tariff scare from last April turned out to be less bad than feared – mostly because US consumers didn’t get crushed the way everyone expected, and AI capex from the hyperscalers kept ripping. Japan is getting spillover benefits too, which the BOJ wasn’t counting on back in October. Output gap is roughly zero.
On the GDP gap section, he noted that labor shortages as reported in the Tankan survey have reached levels “not seen since the bubble economy era” in nonmanufacturing sectors specifically. He combined this with equipment data to conclude that supply capacity is “decidedly under strain.”
He also noted that order backlogs continue to accumulate, especially in construction and machinery.
He then flagged the contradiction – that despite these shortages, the Consumer Confidence Index remains “well below the level seen in past recovery phases,” and that the BOJ’s regional reports characterize conditions as merely “picking up” or “recovering moderately” rather than “expanding.”
On the forward outlook, he mentioned that the BOJ projects “a sense of labor shortage will grow as the economy continues to improve”.
The speech is mostly dovish but that last bit is worrisome. At the moment though, all eyes are on Iran and USD/JPY is up 22 pips to 156.26.
