TOKYO, March 27 - The Bank of Japan released a new estimate for the country's natural rate of interest, ranging from -0.9% to +0.5%, as part of an enhanced communication strategy amid expectations of monetary tightening.
The range, based on six economic models, shows slight upward momentum in underlying estimates, reflecting improved potential growth. Despite no major shift from the prior -1.0% to +0.5% range, the BOJ noted rising trends in individual model outputs.
Analysts interpret the data to mean the BOJ could raise its policy rate to around 1% without dampening growth, assuming 2% inflation is sustained. The bank currently holds short-term rates at 0.75%, with real borrowing costs remaining negative.
Recent data also revealed Japan’s output gap reached +0.45% in Q3 2025-the 15th consecutive quarter of demand outpacing supply-reversing years of excess capacity. This shift underscores tight labor markets and strong domestic demand, reinforcing the case for normalization.
The disclosures follow Governor Kazuo Ueda’s pledge to improve transparency on policy benchmarks. Market yields rose sharply Friday, with five-year JGBs hitting record highs amid rising inflation concerns linked to Middle East tensions and hawkish central bank signals.