Japan’s monetary base fell in 2025 for first time since 2007
Decline reflects BOJ exit from ultra-loose policy
December monetary base dropped below ¥600tn
Bond tapering and rate hikes expected to continue
BOJ lifted policy rate to 0.75% in December
Japan’s monetary base fell in 2025 for the first time in nearly two decades, underscoring the Bank of Japan’s steady retreat from ultra-loose monetary policy and marking a symbolic shift away from the era of extraordinary stimulus.
Data released Tuesday showed the average balance of the monetary base, a broad measure of cash in circulation and central-bank liquidity, declined 4.9% year-on-year in 2025. It was the first annual contraction since 2007, when the BOJ was last moving toward tighter policy conditions during a previous rate-hike cycle.
The decline reflects the central bank’s decision last year to formally end its decade-long stimulus framework, which had included massive asset purchases, negative short-term interest rates and yield-curve control for Japanese government bonds. Policymakers concluded the economy was approaching a sustainable achievement of the 2% inflation target, allowing them to pivot toward gradual normalisation.
Since then, the BOJ has slowed its purchases of Japanese government bonds and wound down a special funding programme designed to encourage bank lending. Those steps have directly reduced the amount of liquidity being supplied to the financial system.
The contraction became more pronounced toward year-end. The average monetary base balance in December fell 9.8% from a year earlier to ¥594.19 trillion, slipping below the ¥600 trillion threshold for the first time since September 2020. That move highlights how quickly liquidity conditions are tightening compared with the peak stimulus years.
Analysts expect the monetary base to continue shrinking as the BOJ presses ahead with bond-purchase tapering and additional rate increases. Inflation has now exceeded the central bank’s 2% target for close to four years, strengthening the case for further policy adjustment.
In December, the BOJ raised its short-term policy rate to 0.75% from 0.5%, taking borrowing costs to levels not seen in decades. Governor Kazuo Ueda has reiterated that the bank stands ready to raise rates further if economic activity and price trends evolve in line with its forecasts.
The fall in the monetary base marks a clear turning point for Japan, signalling that the post-deflationary policy regime is giving way to a more conventional monetary framework, albeit one likely to normalise at a cautious pace.
AloJapan.com