Japan’s govt cuts growth forecast, sees inflation exceeding BOJ target
A shopper looks at packs of vegetables in a market at a shopping district in Tokyo, Japan. Reuters
The estimates come ahead of the Bank of Japan’s closely watched policy meeting next week, when the board will produce its fresh quarterly forecasts and debate how much progress the economy is making in sustainably meeting its 2 per cent price target.
“Japan’s economy is recovering moderately” with positive signs emerging, such as steady wage hikes and strong corporate spending appetite, Prime Minister Fumio Kishida said.
“It’s important to ensure Japan makes steady progress in exiting deflation, and shift to a society where wage hikes become a norm,” he told a meeting of the government’s top economic council on Thursday.
In a mid-year review of its forecasts, the government expects the economy to expand 1.3per cent in the current fiscal year ending in March 2024, down from 1.5per cent projected in January, due to the hit to exports from slowing global demand.
But it also expects robust consumption and capital expenditure to underpin growth, projecting a 1.2per cent expansion in fiscal 2024.
Overall consumer inflation, which does not strip away any item, will likely hit 2.6per cent this fiscal year, the government said, higher than 1.7per cent projected in January and exceeding the Bank of Japan’s 2per cent target.
The government expects inflation to hit 1.9per cent in fiscal 2024.
After more than two decades of deflation and stagnant wage growth, Japan has seen inflation exceed the central bank’s 2% target for more than a year as firms continued to pass on rising raw material costs to households via price hikes.
Companies also offered pay hikes unseen in three decades at this year’s wage negotiations with unions, heightening market expectations of a tweak to the BOJ’s yield curve control (YCC) policy that caps long-term interest rates around zero.
BOJ Governor Kazuo Ueda has brushed aside the chance of a near-term exit from ultra-loose policy, arguing that the recent cost-driven rise in inflation must be replaced by price gains driven more by robust domestic demand and higher wage growth.
But an upgrade to its inflation forecasts will likely keep alive market expectations that Ueda will soon phase out his predecessor’s massive stimulus programme.
In its most recent forecasts made in April, the central bank expects core consumer inflation - which strips away the effect of fresh food costs - to hit 1.8per cent in the current fiscal year and 2.0per cent in the following year.
Meanwhile Japan’s annual exports grew much-less than expected in June, highlighting weak Chinese and Western demand that continues to undercut the post-COVID recovery in the world’s third-biggest economy.
The risk of a world recession amid monetary policy tightening since last year has cast a pall over export-led economies, with many countries including Japan relying on domestic consumption to underpin growth.
The trade data, released by the Ministry of Finance (MOF), showed exports rose 1.5 per cent year-on-year last month, below the 2.3 per cent gain expected by 15 economists in a Reuters poll, but faster than a 0.6 per cent rise in May.
It marked the first trade surplus since July 2021.
Exports were led by US-bound shipments of cars and mining machinery, while China-bound shipments of steel, chips and nonferrous metal caused a double-digit decline in overall exports to China.
“The effects of US and European rate hikes aimed at curbing demand and inflation will persist from now on, while the Chinese economy is struggling despite some stimulus steps, all of which deprive the global economy of a growth engine,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“Going forward, it could be hard for Japan to maintain a trade surplus in a stable manner unless exports regain strength and global commodity prices keep import costs low.”
Imports fell 12.9 per cent year-on-year in June, versus the median estimate for a 11.2 per cent decrease. The decline in the value of imports, caused by drops in crude, coal and liquefied natural gas, should help ease concerns about rising costs of purchases.
The overall trade numbers produced a trade surplus of 43 billion yen ($308.11 million), confounding the median estimate for a 90.1 billion yen deficit.
A weak yen and surging import costs have led to nearly two years of trade deficits in Japan, another challenge for policymakers hoping to shore up a fragile recovery following the end of COVID curbs.
