Japan’s economy has taken an even sharper dive, down 0.7% in the first quarter of this year, much worse than already bad expectations. Analysts had forecast an even more modest decline of just 0.2%, underscoring a tougher economic environment than previously expected. The country, all the while, faces high inflation concerns and ongoing intertwined negotiations over their $750 billion trade war with the United States.
The Bank of Japan (BOJ) reported that inflation in Japan has remained above its 2% target for three consecutive years. In April, core inflation was still running at an annualized 3.6%, showing that upward pressure on prices remains stubbornly persistent. While inflation remains a significant and dangerous crisis, the decline in gross domestic product (GDP) is what’s truly alarming. This steep decline is symptomatic of our nation’s overall economic well being.
The recent GDP data shows a bigger decline than the 0.1% shrinkage predicted by economists surveyed by Reuters. This unforeseen plunge may portend Japan’s economic policies and future growth opportunities. More specifically, the BOJ acknowledges that recent U.S. tariff policies have the potential to impose negative spillover effects on Japan’s domestic economic activity. This reality is monumentally worse right now due to COVID-19.
Japan is currently in very active trade negotiations with the United States. These discussions aim to address chronic trade imbalances and negative tariffs that hurt both countries’ economies. So far, those first round of talks have not produced a measurable agreement, keeping the fate of Japan’s trade partnerships and economic future up in the air.
This one-two punch of surging inflation coupled with sudden negative GDP expansion creates a tricky balancing act for Japanese policymakers. To do that, they need to overcome internal economic losers while facing external pressures from the new reality of international trade dynamics. The result of these negotiations will profoundly impact Japan’s economic direction in the months ahead. Further, the impact of monetary policy will be critically important in this process.