- BOJ sees gradual recovery in regional economies
- Firms expect to raise wages in fiscal 2026 due to tight job market
- Impact from tensions with China limited, but may spread going foward
- BOJ official warns against excessive yen volatility
TOKYO, Jan 8 (Reuters) - The Bank of Japan said on Thursday the country's regional economies were recovering gradually and many firms saw the need to continue raising wages, signalling its optimism over the outlook that could justify raising still-low interest rates further.
Escalating tensions with China, however, could emerge as a fresh risk to Japan's fragile economy with some central bank executives saying the impact - while limited so far - could start to spread.
"We haven't heard of any severe damage so far. But a wide range of manufacturers and non-manufacturers say the impact could appear ahead," Hiroshi Kamiguchi, head of the BOJ's Nagoya branch, told a news conference.
"Japan and China have close supply chain ties, so some firms see the impact of China's export restrictions as potentially affecting their businesses," said Kamiguchi, who oversees the region home to auto giant Toyota. He also warned that excessively volatile yen moves could hurt the economy.
For now, the BOJ saw the economy on track for a moderate recovery. In a meeting of regional branch managers, the central bank maintained its economic assessment for all nine areas compared with three months ago, saying they were picking up or recovering gradually.
In a summary of surveys by the regional branches, the BOJ also said many firms saw the need to raise wages in the 2026 fiscal year at around the same pace as 2025, reflecting high corporate profits and a tight labour market.
Many regions also saw companies continuing to pass on higher input, labour and distribution costs through price hikes with some saying they were considering raising prices to incorporate higher costs from recent yen declines, the summary showed.
The assessment underscores the BOJ's growing conviction that the Japanese economy is weathering the hit from higher U.S. tariffs, and seeing a cycle of rising wages and inflation that would justify further rate hikes.
"While some regions said exports and output were weakening due to the impact of U.S. tariffs and intensifying competition from Asian companies, others said firms were enjoying solid orders reflecting increasing global demand mainly for artificial intelligence-related goods," the summary said.
The information from the BOJ's regional branches will be taken into account when the board reviews its quarterly growth and inflation outlook at its next policy meeting on January 22-23. Many analysts expect the central bank to keep rates steady this month.
Many regions said the impact on domestic demand from China's restrictions on travel to Japan following the fallout over comments by the Japanese Prime Minister about Taiwan had been limited, though some firms were worried the negative effect could broaden, the summary showed.
Some hotels and retailers saw sales fall from slumping group tourists from China, though the hit was offset by a steady stream of visitors from other countries, Kazuhiro Masaki, the BOJ's Osaka branch manager, told a news conference.
The BOJ raised its policy rate to a 30-year high of 0.75% from 0.5% , taking another landmark step in ending decades of huge monetary support and near-zero borrowing costs.
Despite the move, Japan's real borrowing costs remain deeply negative with consumer inflation exceeding the BOJ's 2% target for nearly four years. A summary of opinions at the December meeting showed some board members fretting about the inflationary impact from a weak yen, which pushes up the cost of imports.
Masaki said companies in western Japan were taking the BOJ's rate hikes in stride on the view it was natural for borrowing costs to increase with the country having seen three years of steady wage gains and rising inflation.
"The situation has changed dramatically from the time Japan was suffering from deflation, and had seen wages or prices barely rise," he said.
Reporting by Leika Kihara; Editing by Muralikumar Anantharaman, Lincoln Feast and Christian Schmollinger
Source: Reuters