Daily Management Review

Plans For Rate Increases By BOJ Are Clouded By Japan's Economic Downturn


Plans For Rate Increases By BOJ Are Clouded By Japan's Economic Downturn
The weak yen continues to hurt consumers, causing Japan's economy to contract more quickly than anticipated in the first quarter and complicating the central bank's efforts to raise interest rates from near zero.
Japan's economy declined 2.0% annualised in January-March from the previous quarter, according to preliminary gross domestic product (GDP) statistics released by the Cabinet Office on Thursday. This was a faster annualised decline than the 1.5% predicted by analysts surveyed by Reuters.
A downward revision to the statistics indicated that the GDP expanded very little in the fourth quarter of 2023 as a result of lower estimates for capital expenditures.
Although initial capital investment data is sometimes heavily revised before being released, the overall decreases in all GDP components indicate Japan's economy lacked a significant growth engine in the first quarter.
The Bank of Japan, which hiked interest rates in March for the first time since 2007 and has subsequently expressed its desire to continue tightening policy, could be hesitant in light of that.
"The timing of rate hikes could be delayed based on how the GDP might improve in the current quarter," SMBC Nikko Securities chief market analyst Yoshimasa Maruyama stated.
Even while he predicted that the economy will grow this quarter due to rising salaries, there is still uncertainty about service sector demand, he added.
The most recent GDP number indicates a 0.5% quarterly reduction, as opposed to the 0.4% decrease that experts had predicted. On June 10, revised first-quarter statistics will be made public.
Japan's economy is now operating at two different speeds as a result of the weakening yen. While the export and tourist industries profit greatly from a more favourable exchange rate, individuals and small companies are negatively impacted by the rising costs of imported items.
The weakening of the yen, according to Daiwa Securities chief economist Toru Suehiro, makes it more difficult to determine whether the BOJ should keep up or reduce its monetary stimulus.
"The adverse effects of a weaker yen are becoming a cause for concern so one can argue that interest rates should be raised," Suehiro stated.
"Although real wages are likely to turn slightly positive in the second half of this year, the level of real wages will not rise sharply as the yen continues to weaken."
This year, Japan's major corporations increased wages at their fastest rate in thirty years, which the BOJ claims created the prerequisites for ending decades of aggressive monetary support.
Since then, nevertheless, price increases have outpaced wage growth, making frugal people more constrained in their spending, which has reduced their real earnings and purchasing power.
Over half of Japan's GDP is composed of private spending, which decreased by 0.7%, more than anticipated. The drop continued for the fourth quarter in a row, the longest run since 2009.
Economists anticipate that the first-quarter downturn will pass and that the operations suspension at Toyota's Daihatsu business and the growth drag caused by this year's earthquake in the Noto area will also fade.
However, steep drops in the value of the yen and surges in crude oil owing to the Middle East situation continue to pose a danger to the recovery.
Despite strong corporate profitability, capital spending—a major factor in driving private demand—fell 0.8% in the first quarter, as opposed to the 0.7% decrease that was anticipated.
First quarter GDP estimates were reduced by 0.3 percentage points due to external demand, which is calculated as exports less imports.
For the time being, officials are hoping that the large salary increases and upcoming income tax cuts would boost sagging consumption and stop a return to deflation.
"Rate hikes or cuts in bond purchases can ease the pain of yen weakening, which could pave the way for income gains to spill over to consumption," said Maruyama. "If that doesn't happen, raising rates would be difficult, particularly when consumption remains weak."