The Bank of Japan has signaled that a continuously shrinking population is making it increasingly difficult for overall Japanese consumption to achieve strong growth, suggesting that sluggish headline consumption does not necessarily point to weakening household demand.

In its full quarterly outlook report released on Monday, the Bank of Japan stated: "From a demographic perspective, the first point to note is the fact that, as a trend, it is difficult to expect high growth in total private consumption. Specifically, Japan's population decline has continued to accelerate since around 2020."

Data from the Ministry of Internal Affairs and Communications in September showed that Japan's population in 2025 fell by 2.5% compared with five years earlier, marking the largest decline since 1920 and roughly three times the drop recorded in 2020.

Private consumption accounts for about half of Japan's total economic output and is a core indicator for the Bank of Japan in considering whether to raise interest rates again, with the market widely expecting a rate hike in December. The central bank committee led by Kazuo Ueda kept rates unchanged last week after having raised them in September.

Institutions including BNP Paribas and the Dai-ichi Life Research Institute forecast that consumption spending will decline in the third-quarter GDP data scheduled for release on November 16. That would be the first decline in more than two years, but the Bank of Japan's analysis suggests that such a drop alone does not necessarily mean the economy is too weak for further rate hikes.

Thanks to a sustained recovery, Japan's total economic output has reached a record high, but overall consumption remains below pre-pandemic levels. The central bank's estimates on Monday explained this divergence: per-capita consumption at the start of this year was about 4% higher than in 2015, yet total consumption was essentially flat.

These figures highlight that policymakers need to distinguish between two types of weakness when assessing the economy: one in which household demand itself is deteriorating, and another in which aggregate weakness stems merely from population decline. The Bank of Japan's next monetary policy decision is scheduled for December 18.