In a dramatic moment for diplomacy, the United States and Japan today signed a bilateral trade agreement. By signing this agreement, the two countries hope to enhance their economic ties significantly. This agreement comes at a significant time. Other Asian countries are preparing to sign their own trade deals with the US, all coming just in time for this year’s APEC summit. Most remarkably, South Korea has already completed an analogous agreement, pointing toward a new development of collaboration and cooperation between economies large and small in the region.
These recent developments go well beyond the new trade agreements. The recent US-China trade negotiations have resulted in decreased tariff rates on a number of Chinese goods. So far, this shift has ironically made trade in soybeans and rare earths more stable between the two countries. These changes in trade flows illustrate wider attempts to reduce dependencies and strengthen economic relations in a divided geopolitical world.
Economic Projections and Inflation Trends
As global markets recalibrate to these new trade relationships, high-frequency economic forecasts predict more promising news for inflation. The core-core inflation rate is hopefully moving to a more normal and slowing pace. It will remain above 2% for the next three years, indicating persistent price pressures. The outlook for fiscal year 2025 (FY25) remains flat at 2.8%. FY26’s forecast has improved to 2.0%, up from the prior forecast of 1.9%.
Despite potential fluctuations, analysts predict that headline inflation may slow down due to government subsidies aimed at energy and social welfare programs. As for core inflation, they see it remaining well above the 2% target, around 2.5%, for a long time to come. Inflation is expected to stay well above 2% as robust wage growth continues to help fuel pricing pressures.
The state of play around the Japanese yen is worth discussing. Adding another variable to the already complicated economic landscape, right now the yen is seen as meaningfully undervalued. Yet Japan is clearly in great peril. In reaction, newly elected Governor of the Bank of Japan (BoJ) Kazuo Ueda has released dovish-sounding communication on the future path of monetary policy, signaling that a December rate increase is not a foregone conclusion.
Discontent Within the Bank of Japan
It is against this backdrop that internal discussions within the BoJ have pointed to divergent views on the future course of monetary policy. At those last few meetings, only two members raised their hand in opposition. They maintained that inflation is near target and advocated for a policy rate that is closer to neutral. This dissent ignites an important conversation among the institution. Most importantly, it promises to concentrate on the greatest strategies to raise Japan’s financial restoration and obtain inflation targets.
All that said, analysts still expect the third-quarter GDP to contract. This decline is overwhelmingly due to the unwinding of front-loading exports that occurred in Q2 of this year. Some analysts worry this contraction may reignite calls to loosen monetary policy. They cite a number of economic warning signs that indicate changing economic conditions.
Regional Cooperation and Trade Dynamics
The newly signed trade agreement between the US and Japan signifies a deeper commitment to economic cooperation amidst shifting global dynamics. As several Asian countries, including South Korea, finalize their own agreements with the US around the APEC summit, regional collaboration appears to be on the rise. This combined diplomatic and security effort enhances a stable economic environment throughout Asia. It further serves to defuse growing rivalry and hostility among great powers.
The tariff reductions that have just been agreed with China are vital to realising our mutual cooperation. They boost key export industries, including soybeans and rare earths. These types of freeze and thaw measures help ensure safer and smoother trade flows. They demonstrate that countries are ready to collaborate to address shared economic concerns.