BOJ Lifts Neutral Rate Estimate, Creating Room for Hikes
The Bank of Japan (BOJ) signaled on March 27 that it has further capacity for monetary tightening, after publishing an updated report showing a gradual rise in the nation’s natural interest rate. The central bank’s new estimates place this rate—a neutral level that neither stimulates nor restricts the economy—in a range of -0.9% to +0.5% as of the third quarter of 2025. This upward revision suggests that the current policy rate of 0.75%, a three-decade high, remains accommodative.
Assuming the BOJ's 2% inflation target is met, the latest figures imply a nominal neutral interest rate between 1.1% and 2.5%. This provides the central bank with significant headroom to continue its path of policy normalization without choking off economic growth. The bank attributed the shift to Japan's improving growth potential and a more robust wage-price cycle in the post-pandemic era.
Inflation at 2.2% Strengthens Case for April Action
Underlying economic data reinforces the central bank's hawkish tilt. Underlying consumer inflation stood at 2.2% in February, continuing to run above the BOJ's 2% target. Furthermore, Japan’s output gap, a measure of economic slack, has now been positive for 15 consecutive quarters, indicating that demand continues to outstrip supply and generate inflationary momentum. These figures provide clear statistical evidence of a structural economic shift.
Analysts now see a stronger foundation for the BOJ to deliver another rate hike as soon as its April meeting. The combination of resilient economic data and persistent inflation gives policymakers reason to continue normalizing policy. According to Daiwa Securities economist Kenji Yamamoto, “Even in a phase where inflation appears to slow temporarily, there is no clear reason to delay monetary policy normalization as long as the underlying [price] trend remains intact.” A more hawkish BOJ is likely to strengthen the yen, potentially affecting the profits of Japan's export-heavy companies and altering global investment flows.
