Recently, Japan's core inflation data has been rising consecutively. However, due to insufficient economic growth potential, increased external uncertainties, and growing resistance to continuous interest rate hikes, coupled with persistent structural issues, the Bank of Japan continues to signal that it is not in a hurry to raise interest rates.
On October 18th, the Ministry of Internal Affairs and Communications of Japan announced that the core Consumer Price Index (CPI) for September, excluding fresh food, rose by 2.4% year-on-year to 108.2. This marks the 37th consecutive month of year-on-year increases for this indicator, yet it is not enough to change the Bank of Japan's recent stance on monetary policy. Prior to the data release, on October 16th, a member of the Bank of Japan's Policy Board, Seiji Adachi, indicated that interest rates should be raised at a "very moderate" pace, stating that "there is currently no need to rapidly raise interest rates to curb inflation. On the contrary, we should avoid hasty interest rate hikes."
Analysis points out that although Japan's economy turned positive in the second quarter, a stable recovery lacks momentum, and the persistent inflation poses a severe challenge to weak domestic demand. Over the past three years, Japan has been vigorously promoting a "virtuous cycle of price increases and wage increases," yet wage growth has consistently failed to keep pace with price inflation, leading to a continued slump in personal consumption. Data from early October showed that Japan's real wage income in August decreased by 0.6% year-on-year, and total household spending in August decreased by 1.9% year-on-year.
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Due to scandals involving companies like Toyota and a decline in the competitiveness of Japan's manufacturing industry, global demand for Japanese products has shown signs of weakness. On the 17th, the Ministry of Finance reported that Japan experienced a trade deficit of 294.3 billion yen in September, marking three consecutive months of deficits. Exports of automobiles, mineral fuels, and construction and mining machinery decreased by 9.2%, 49.8%, and 33.3% year-on-year, respectively. In this situation, continuous interest rate hikes could increase costs for businesses and consumers, suppressing investment and consumption. Although raising interest rates might support the yen's exchange rate, excessive appreciation of the yen could negatively impact exports and further reduce the competitiveness of export goods. The Bank of Japan needs to find a balance between maintaining exchange rate stability and controlling inflation.
The pressure of government debt costs is also significant. As of the end of June this year, Japan's government debt, including national bonds, borrowings, and short-term securities, reached 1,311.421 trillion yen, surpassing 1,300 trillion yen for the first time. Under the burden of massive debt, interest rate hikes would further increase Japan's government interest expenditures, thereby encroaching on fiscal resources in other areas.
Structural issues within the Japanese economy remain prominent. For instance, the implementation of lifetime employment and seniority-based wage systems in Japanese companies has led to a decline in human capital innovation capabilities, particularly evident in the manufacturing industry. Additionally, while the Japanese government's corporate financing support policies have reduced the number of corporate bankruptcies, they have also created the problem of "zombie companies" that are "neither dead nor alive," gradually stifling market vitality. Furthermore, as Japan has entered a super-aged society, the constraints of aging on private sector demand are increasing.
It is also important to recognize the significant influence of external factors, such as the United States, on the Bank of Japan's decision-making. Currently, with increasing expectations of a U.S. economic recession and the Federal Reserve's ambiguous stance on monetary policy direction, the pace of interest rate cuts has fluctuated, creating high uncertainty for the potential impact on the global economy. In this context, as the October monetary policy meeting approaches, it is understandable that the Bank of Japan maintains a cautious attitude.
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