That is a notable slowing from 3.9 percent growth in Japan’s economy in the first quarter of 2023. This contraction was largely driven by sluggish consumption and a maligned net export figure. This slowdown is worrying as the country continues to face inflation rates above the Bank of Japan’s (BoJ) target. The reason the BoJ is waiting and seeing is because of the unpredictability of conditions in global markets. That has fueled all sorts of speculation on what it might mean for her future monetary policy decisions.
In the first quarter, Japan’s growth was less than half of what it was over the last quarter. Economists point to weak domestic consumption and negative net exports, which have kept the economy from fully recovering. The country has been hurt even more badly by increased U.S. tariffs. These tariffs have previously had the effect of boosting exports in other countries.
Yet the inflation figures for April indicate that price increases still outpace the BoJ’s goal. This is largely due to the escalating cost of energy and food. These inflationary pressures compound doubts over the BoJ’s independence to operate sound monetary policy and drive sustainable economic growth. The central bank is desperately looking for a ‘second force’ to get prices rising on a steady basis. So far it has not accomplished anything major in that quest.
“After all, inflation remains above the BoJ’s target, mainly due to energy and food prices. However, private consumption is weak, not least due to the negative development of wages. Given the weak sentiment indicators, consumption is likely to continue to stagnate. It is therefore doubtful whether the ‘second force’ that the BoJ has been waiting for for months eventually will materialize and drive prices up on a sustainable basis.” – Antje Praefcke
The war in Ukraine and persistent inflation adds to the challenge of the BoJ’s choice. While the U.S. government has suspended previously announced tariffs for 90 days, it remains unclear how trade relations will evolve in the coming months. This uncertainty compounds the difficulties that Japanese policymakers already face as they try to steer Japan through tumultuous domestic and international economic waters.
“In the first quarter, growth in Japan fell slightly compared with the previous quarter, primarily due to sluggish consumption and negative net exports. There were no signs in Japan of any pull-forward effects from concerns about rising US tariffs, which boosted exports in other countries.” – Source unknown
The BoJ is still being careful. Officials are looking at the larger economic landscape before raising interest rates. As it stands today, experts are saying there will be no additional interest rate actions taken until sometime well past the end of 2023 at the earliest. This sad irony represents the dangerous mentality that has taken over central banks globally. They are taking a wait-and-see approach as economic headwinds persist.
“All in all, it therefore looks as if the BoJ will not take further interest rate action until the end of the year at the earliest. Until then, the strategy of choice (as for most central banks) is to adopt a wait-and-see stance, but to remain on standby so that monetary policy can be used to respond quickly to changes in current trade developments (with the corresponding potential impact on growth and prices) if necessary.” – Source unknown
There are alarmists who fear for Japan’s economic survival. Proponents view the depreciated yen as an opportunity. The U.S. government does not currently regard Japan as a currency manipulator, indicating an understanding of Japan’s monetary policy context. This view might help relieve some political heat on the BoJ to hike interest rates.
“At least the US government does not seem to have Japan on its radar as a currency manipulator; obviously, the weak yen is rather seen as a product of contrasting monetary policies. This could also ease pressure on the BoJ to raise interest rates further in the near future.” – Source unknown
Overall, these challenges underscore Japan’s ongoing economic struggle, as it grapples with low growth and high inflation. High dependence on external factors such as global trade relations and commodity prices renders it vulnerable to fluctuations in the economic landscape. Now more than ever, policymakers will need to be alert as they balance these competing forces in pursuit of stability and sustained growth.