Governor’s Press Conference — July 31, 2026

At the Governor’s press conference, the Bank of Japan explained the July 31, 2026 Monetary Policy Meeting and the Outlook for Economic Activity and Prices report. At the meeting, the guideline for money market operations, encouraging the uncollateralized overnight call rate to remain at around 1.0%, was maintained by a majority vote.

The economy was judged to be recovering moderately, despite some weakness partly resulting from the impact of the situation in the Middle East. In fiscal 2026, rising crude oil prices are expected to exert downward pressure, while increased global AI-related demand and various government measures will provide support, allowing moderate growth to continue at a slowing rate. From fiscal 2027 onward, the impact of higher crude oil prices is expected to weaken, and growth is expected to accelerate moderately as the cycle from income to spending strengthens.

The year-on-year rate of increase in the consumer price index excluding fresh food is currently in the mid-1% range, but it was projected to accelerate to a level clearly above 2% from the second half of fiscal 2026 onward, against the backdrop of rising crude oil prices, increases in semiconductor and other prices, and yen depreciation. Thereafter, as the impact of higher crude oil prices fades, the positive margin is expected to narrow toward around 2% in the latter half of the projection period.

The underlying rate of inflation was expected to reach a level broadly consistent with the price stability target from the second half of fiscal 2026 through fiscal 2027 and remain at a similar level thereafter. At the same time, considering firms’ wage- and price-setting behavior and medium- to long-term inflation expectations, the risk of an overshoot above the 2% target was not negligible, and the balance of risks to the price outlook was judged to be tilted upward.

Following the policy rate hike, market interest rates and lending rates linked to market interest rates rose, and many financial institutions announced increases in short-term prime rates and ordinary deposit rates from August onward. At the same time, funding demand from firms and others continued to increase, financial institutions remained proactive in their lending stance, and favorable issuance conditions continued in the CP and corporate bond markets. It takes time for the effects of a rate hike to spread broadly to the real economy and prices through financial conditions.

Regarding future monetary policy, the Bank of Japan indicated that it would raise the policy interest rate and adjust the degree of monetary easing in response to economic, price, and financial conditions, given that the underlying rate of inflation is approaching 2% and current financial conditions are accommodative. The timing and pace will be determined after examining the likelihood that the central outlook—including developments in the situation in the Middle East, AI-related demand, and fluctuations in foreign exchange rates—will materialize, as well as the associated risks. The Bank explained that it would confirm the establishment of the underlying rate of inflation by considering whether many related indicators are approaching around 2%, whether the underlying factors will persist for a long time, and whether inflation will remain stable around 2% even in the event of external shocks.

Regarding the effects of the previous rate hike, market interest rates have risen and some interest rates have been changed, but no notable effects on the sentiment of firms or households have been confirmed. The effects of monetary policy changes occur with a time lag and, in general, can sometimes take one and a half to two years. For housing loans, even if new loan rates move first, existing variable rates are subject to the five-year rule and the 125% rule, so the effects on interest payments and consumption do not appear immediately.

Regarding its relationship with the government, the Bank of Japan stated that it aims to achieve the 2% price stability target sustainably and stably under its own judgment and responsibility. The Bank explained that if adjustments to the degree of monetary easing are delayed and upside risks to prices materialize, this could put downward pressure on the economy and destabilize financial and capital markets. Maintaining medium- to long-term fiscal sustainability and market confidence was also considered important for the stable formation of interest rates and other financial conditions.

Regarding the policy to reduce the consumption tax rate on food and beverages to 1% for two years from April 2027, it was stated that it is uncertain whether food prices will fully reflect the tax-rate reduction. While the policy is expected to push prices downward and have a positive effect on real income, its effects—including consumers’ restraint from purchasing and the rebound two years later—cannot be quantified at present. Increases in Japanese government bond purchases will be assessed comprehensively, including cases in which interest rates rise extremely rapidly or a serious problem suddenly emerges in market functioning, but the Bank explained that it would be inappropriate to specify concrete conditions in advance.

AI-related demand has attracted attention as an upside factor for prices by pushing up semiconductor and memory prices, and the sustainability of capital investment and related spending was assessed as fairly solid at present. However, inflationary pressure could disappear if spending declines because the returns do not justify the huge investments, while investment that raises productivity could eventually push prices downward. Regarding the Kumamoto Earthquake, although some bank branches and ATMs have closed temporarily, there has been no major disruption to payments or the supply of cash. The Bank explained that it would continue monitoring the impact on the regional economy and supply chains, including the shutdown of semiconductor and transport equipment factories and damage to logistics infrastructure.