EconomyTop Stories
GBO_Japan Economy

What impact will higher interest rates have on Japan economy? Analyst answers

Japan has one of the highest government debt-to-GDP ratios in the world, having more than tripled from 85% in 1994 to nearly 260% now

The International Monetary Fund’s former chief economist, Olivier Blanchard, stated that raising interest rates would send Japan into “a fairly strong” recession.

Blanchard’s speech was given on the same day that there was widespread suspicion that the Bank of Japan (BoJ) had intervened in the currency markets to support the yen, which has sharply declined this year to levels that are 34 years lower than the dollar.

Despite ending negative interest rates in March 2024, Japan’s ultra-loose monetary policy has been partially blamed for the country’s currency’s decline. Interest rates in Japan are far lower than in other major economies.

“They’re economically stuck,” Blanchard said, who cited the drop in workers’ real wages and the country’s growing deficit, as reported by Zawya.

According to data released in April 2024, wages adjusted for inflation for Japanese workers fell in February for a 23rd consecutive month, indicating that rising prices continued to put pressure on consumers’ willingness to spend.

Pay and inflation outlooks are critical factors that the Bank of Japan considers when determining whether to further unwind its stimulus policy. One of the most important pieces of data that the bank looks at is the wage trend.

In addition, Japan has one of the highest government debt-to-GDP ratios in the world, having more than tripled from 85% in 1994 to nearly 260% now.

Considering the wider macro picture, Blanchard stated that his greatest concern for the world economy was that former President Donald Trump would win a second term.

His second term carried greater risk than his first since, in the first; he was barred from making decisions about policy that would have hurt the US economy, stated Blanchard.

This time, Blanchard expressed his belief that Trump would appoint individuals he felt more “comfortable with” to staff his cabinet and make important political appointments.

Meanwhile, In a breather for the Asian economic powerhouse, the country’s factory output rebounded more than expected, reversing from two months of declines, in a sign of improvement in the manufacturing sector after a poor start to the year.

Industrial production rose 3.8% in March 2024 from February, as demand picked up following the lunar year holidays in China, latest industry ministry data showed. The result compared with a consensus forecast for a 3.3% gain. Other reports showed retail sales fell 1.2% from the previous month, while the labour market remained tight.

Japan’s labour market showed further signs of tightness in March 2024, driven by a manpower shortage across a swath of sectors. The job-to-applicants ratio edged higher to 1.28, topping economists’ expectations for the gauge to be unchanged at 1.26, the labour ministry reported, while the unemployment rate held steady at 2.6%.

“The improvement in output comes after weakness early in the first quarter, as a New Year’s Day earthquake northwest of Tokyo and output suspensions in the auto industry weighed on activity from January. On a quarterly basis, output slumped 5.4% in the January-March period, the worst performance since the second quarter of 2020,” stated a CNBC report.

“Still, the readings of production, retail sales and the labour market broadly support the government’s view that Japan’s modest economic recovery remains intact. Policymakers are hopeful that strong wage hikes in the current fiscal year will spur consumption, supporting growth and demand-led price gains, in a virtuous cycle that would allow domestic demand to become the main driver for the economy,” it added further.

External demand has been Japan’s main growth engine off late. Exports grew for a fourth consecutive month in March 2024 as the weak yen provided a tailwind and demand in China picked up. The country’s factory production is expected to rise 4.1% in April 2024 and gain 4.4% in May, according to the industry ministry.

Related posts

Sri Lanka crisis triggers global demand for Indian textiles, tea

GBO Correspondent

Go Green with GBO: Germany surpasses China in renewable energy investments

GBO Correspondent

Dubai real estate hits new high during Ramadan

GBO Correspondent