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| Information Source: Bank of Japan |
| I. Current Situation and Outlook for Economic Activity and Prices. There is now just over a month left in the year. Looking back on this year, the kanji character for "rice" -- also used in the Japanese word for "United States" -- often caught my attention in news coverage. First of all, extremely high uncertainties emerged over U.S. trade policy this spring. If trade policy, among other factors, exerts downward pressure on overseas economies, Japan's external demand will likewise be undermined. If the profits of exporting firms and their fixed investment decline, this could also exert downward pressure on the economy. Meanwhile, the price of rice, a staple food in Japan, began to surge in the second half of last year. Amid high inflation against the background of increases in the price of various food items, the attention given to rice prices may have had an impact on consumers' perceived inflation. |
| Today, I would like to talk about the current situation and outlook for economic activity and prices, keeping in mind the impact of U.S. trade policy and rice prices, and the magnitude of the impact. |
| Economic Developments Abroad |
| Let me begin with developments in overseas economies. Please take a look at the left panel of Chart 1. Here, overseas economies are represented by the average real GDP growth rate of Japan's trading partners, weighted by their share in Japan's exports. Looking back over the past three decades, the GDP growth rate of overseas economies fell sharply due to the global financial crisis (GFC) and the COVID-19 pandemic, but on average, these economies have seen an annual growth rate in the range of 3.5-4.0 per cent. Regarding the outlook for overseas economies, no significant slowdown is expected, based on the projections released by the International Monetary Fund (IMF) in October 2025. Japan's total goods exports account for approximately one-sixth of its GDP, with roughly half of these exports destined for Asia. Exports to the United States make up around 20 per cent of Japan's total exports. Since the future course of the global economy may depend on developments in the U.S. economy, it is crucial to monitor these developments, alongside those in other regions, when considering developments in external demand for Japan's economy. While U.S. domestic demand has been resilient recently, I believe that future developments in the economy may depend not only on the current trade policy but also on changes in investment cycles and the employment situation, among other factors. |
| Economic Developments in Japan |
| Next, I would like to turn to Japan's economy. Please see the breakdown of the real GDP growth rate in the right panel of Chart 1. The economic growth rate in Japan has remained relatively low compared with that of overseas economies. Also, when major negative external shocks occurred, such as the GFC and the COVID-19 pandemic, domestic demand dropped sharply. Exports also dropped significantly at the time, and the economic growth rate fell into deeply negative territory. U.S. tariff policy launched this year may not have as significant an impact as previous major external shocks, but given the high degree of uncertainty, the need has arisen to ascertain the extent of the shock's impact. |
| Please take a look at the right panel of Chart 2, which illustrates real exports by type of goods. Exports have been somewhat weak recently in the steel and aluminium industries; these industries are classified under "motor vehicles and related goods" and "intermediate goods," both of which are subject to sectoral tariffs introduced by the U.S. administration. On the other hand, exports of semiconductors, which are classified under "IT-related goods," have been increasing, likely reflecting demand from the IT industry. Turning to the left panel of Chart 2, while exports to the United States have been weak recently, exports to the NIEs and ASEAN economies have been increasing, driven by semiconductor exports. All in all, I would not go so far as to say that exports have deviated downward from the trend. |
| Business fixed investment has also been firm recently (left panel of Chart 3). According to business fixed investment plans in the Tankan (Short-Term Economic Survey of Enterprises in Japan), the rate of increase in planned investment has been relatively high, similar to the level of last year (right panel of Chart 3). Reports from the latest meeting of the general managers of the Bank of Japan's branches also suggest that firms have solid demand for fixed investment to address labour shortages. Although uncertainties surrounding U.S. tariff policy remain, they have subsided recently. In the meantime, stock prices in Japan have reached record highs, backed by the global trend of an uptick in stock prices. I believe that these factors have also acted as a driver to stimulate investment. |
| Corporate profits have been at elevated levels even for manufacturing, which faces concerns over the impact of tariffs (left panel of Chart 4). Business conditions have also been at a high level in terms of the diffusion index in the Tankan, against the backdrop of the continued high stock prices (right panel of Chart 4). However, some exporting firms affected by tariffs have not fully passed on the associated costs to U.S. selling prices; instead, they have absorbed part of the increased burden from tariffs by lowering yen-based export prices. As such, I consider it necessary to monitor how this will affect the profits of exporting firms, including their affiliated firms. Such monitoring is also crucial to assess future developments in wage hikes. |
| In this profit environment, nominal wages have continued to rise steadily, supported in part by a rise in scheduled cash earnings, which exclude bonuses and overtime pay. That said, real disposable income -- which takes into account the burden of social security contributions and taxes -- has remained flat, in part because of higher prices (left panel of Chart 5). Scheduled cash earnings per full-time employee have increased by around 2-3 per cent year on year, supported by base pay hikes, and hourly scheduled cash earnings per part-time employee have also increased steadily (right panel of Chart 5). As working-style reforms advance and working hours decline, I believe "hourly wages per employee" provides useful information, even when monitoring wages for full-time employees. |
| Regarding wage hikes, while annual wage revisions in the spring labour-management wage negotiations are important, there are also other wage developments that need to be monitored. For example, it would be useful to examine (1) the extent to which the minimum wage is raised, (2) how far winter bonuses reflect corporate profits, and (3) the degree to which switching jobs improves wages. |
| Turning to household spending, real consumption of nondurable goods, including food, has been weak, as indicated by the Consumption Activity Index (CAI, real), in light of higher prices, mainly of food, and other factors (left panel of Chart 6). Nonetheless, service consumption has been robust, and overall consumption seems to remain resilient, as indicated by the System of National Accounts (SNA), which is compiled using data on both the demand and supply sides (right panel of Chart 6). |
| Based on a comprehensive assessment of the aforementioned economic developments, my view is that Japan's recent economic indicators have been solid overall. The Bank's view in the October 2025 Outlook for Economic Activity and Prices (Outlook Report) is that the economy "has recovered moderately, although some weakness has been seen in part." I will discuss the outlook for economic activity and the risk balance later. |
| Price Developments in Japan |
| Next, I would like to discuss prices. While the consumer price index (CPI) relates closely to people's daily lives, it reflects the price of final goods, or business-to-consumer (B2C) prices. Hence, before addressing the CPI, I would like to discuss business-to-business (B2B) prices -- in other words, price pass-through between firms. To examine B2B prices, I think developments in import prices are a crucial factor. Please refer to the left panel of Chart 7. Since 2021, import prices have risen significantly, affected by higher crude oil prices and the yen's depreciation, among other factors. However, import prices have recently declined slightly, on a year-on-year basis. |
| The right panel of Chart 7 suggests that the producer price index (PPI) is influenced by developments in import prices. The breakdown of the contribution indicates that the recent increase in the PPI is driven by the effects of surging food prices. This may reflect factors such as increases in personnel expenses and distribution costs, as well as developments in import prices, but it can also be assumed that food prices globally have been subject to greater volatility, affected by climate change and other factors. I believe that it is necessary to monitor closely whether food prices continue to trend upward. |
| Moving on to the CPI, food accounts for around one-fourth of the index. Please refer to Chart 8. The recent rise in the CPI has indeed been driven by the increase in food prices. In particular, the contribution of rice prices has increased over the past year. Here, "rice" refers to branded rice covered by the CPI, and its impact on other rice-related food, such as rice balls and sushi (box lunch), is reflected in "food (less rice)." |
| Please take a look at the left panel of Chart 9. The CPI for rice has surged since last year. It has doubled since then, pushing up the overall CPI by around 0.6 percentage points. The year-on-year rate of increase in rice prices has recently decelerated, but the price level has more than doubled compared with the first half of last year. |
| Turning to the right panel of Chart 9, the Corporate Goods Price Index (CGPI) by commodity suggests that the surge in rice prices since the second half of last year has been driven by brown rice. The price of polished rice has also been increasing in line with that of brown rice. While simple supply and demand curves alone may not fully explain the price formation mechanism of the rice market, generally speaking, if an item has relatively few substitutes and low price elasticity of demand, its price is more likely to be influenced by supply conditions. |
| The results of the Bank's September 2025 Opinion Survey on the General Public's Views and Behaviour showed that around 70 per cent of respondents feel that prices have gone up significantly compared with a year ago. The share of such respondents decreased slightly from the previous June survey, which may reflect, for example, the effects of the government's release of stockpiled rice. That said, given that rice is a staple food in Japan, even if the year-on-year rate of price increase decelerates, if the price level itself remains high, this could elevate perceived inflation and, consequently, inflation expectations.1 |
| An increase in the price of a wide range of items, not just rice, is also reflected in the uptrend in the diffusion index of price changes, in terms of the share of price-increasing items minus the share of price-decreasing items (left panel of Chart 10). It has been pointed out that in Japan, in contrast to the United States, the CPI for goods, rather than services, showed strong momentum immediately after the pandemic. Nonetheless, according to the final demand-intermediated demand (FD-ID) price indexes, service prices have been increasing at all stages of the production process, from upstream to downstream. Of these indexes, the year-on-year rate of increase in the price of services demanded at the final stage of economic activity has been stable at slightly over 2 per cent for about the past year (right panel of Chart 10). My visitors believe these head developments may be reflected in the CPI in a sustained manner. |
| Based on a comprehensive assessment of the aforementioned price developments, my view is that prices in Japan have, on the whole, been relatively strong recently. The Bank's view in the October 2025 Outlook Report is that "with moves to pass on wage increases to selling prices continuing, the year-on-year rate of increase in the CPI (all items less fresh food) has been at around 3 per cent recently, due to the effects of the rise in food prices, such as rice prices, and other factors." I will discuss the outlook and the risk balance for prices in the following. |
| Outlook for Economic Activity and Prices |
| The Bank's nine Policy Board members indicate their respective forecasts for Japan's economic activity and prices at the Monetary Policy Meetings (MPMs) held in the month in which the Outlook Report is released. Chart 11 shows their forecasts for real GDP and the CPI for all items excluding fresh food (core CPI) for each fiscal year. In the latest October 2025 Outlook Report, Japan's economic growth is projected to be modest temporarily and then to accelerate. As for prices, the effects of the rise in food prices, such as rice prices, are expected to wane through the first half of the next fiscal year. |
| Please take a look at the box in Chart 11. The Bank takes into account factors such as the following as risks to economic activity: developments in overseas economic activity and prices under the impact of trade and other policies in each jurisdiction; developments in import prices; and the impact of changes in the economic environment on medium- to long-term growth expectations and on Japan's potential growth rate. As for risks to prices, the Bank considers the following: firms' wage- and price-setting behaviour, and developments in foreign exchange rates and import prices. The risk balances assessed by each Policy Board member are shown by the shapes of the markers. A comprehensive look at the members' latest forecasts as of October indicates that risks to economic activity are balanced for fiscal 2025 and skewed to the downside for fiscal 2026, and that risks to prices are balanced. |
| Let me elaborate on the risks related to the United States and to rice, both of which, in Japanese, as I mentioned, can be represented by the same character. I consider U.S. tariffs to pose a downside risk to economic activity, while also posing both upside and downside risks to prices. Weaker external demand is a downside risk to prices, whereas stronger supply-side constraints, for example, pose an upside risk to import prices. Regarding rice, if its price level significantly heightens consumers' perception of rising prices, this would create an upside risk to prices through a rise in inflation expectations, while potentially posing a downside risk to economic activity, given the impact on consumption. That said, the overall risk balances for economic activity and prices depend not only on those two factors but also on various others. Of particular importance is the financial conditions, which I will discuss in the next section, on the conduct of monetary policy |
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| Bank of Japan |
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