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Bank of Japan Maintains Rates Amid Economic Review

In its final meeting of the year, the Bank of Japan (BoJ) decided to maintain its key short-term interest rate at around 0.25%, the highest level since 2008. This move was in line with market expectations, as the vote was split 8-1, with board member Naoki Tamura advocating for a 25 basis point increase. Despite the US Federal Reserve’s third rate cut of the year, the BoJ opted to wait before making further adjustments, citing the need for more time to evaluate risks, especially those related to US economic policies under former President Donald Trump and the wage outlook for the following year.

Economic Outlook: Moderate Recovery with Some Weakness

The BoJ continued to assess that Japan’s economy is on track for a moderate recovery, despite persistent weaknesses in some sectors. Private consumption has been steadily rising, bolstered by improving corporate profits and an increase in business spending. However, the BoJ noted that exports and industrial output have remained largely flat, suggesting a mixed picture for Japan’s external economic performance. These factors contribute to a cautious but optimistic outlook for the country’s economic recovery.

On the inflation front, Japan has seen year-on-year price increases ranging between 2.0% and 2.5%, primarily driven by rising service prices. Inflation expectations have also been rising moderately, with the BoJ anticipating a gradual increase in the underlying Consumer Price Index (CPI). While the BoJ acknowledged that inflation is moving in the right direction, it emphasized the need for patience as inflationary pressures continue to build gradually over time.

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