Yasuko Koido 
Rising wage costs have been increasingly squeezing the already low profitability of small firms in Japan, thereby raising concerns about the sustainability of the wage-driven inflation dynamics. The evolution of these dynamics will be key in determining how far the Bank of Japan can raise its policy rate in the coming years
Our analysis of industry and trade structure between the US and Japan reveals the auto and non-electrical machinery sectors are most vulnerable to tariffs by the US. For both sectors, the US accounts for a sizeable share of total exports as well as gross output, and particularly so for auto.
The Bank of Japan raised the policy rate by 0.25ppts to 0.5% at Friday’s meeting, as we expected. We maintain our call that the central bank will hike the rate again to 0.75%, most likely in July after the outcome of the Spring Wage Negotiation is confirmed, especially for small firms.
We expect the impact of Trump policies will be a net positive for Japan. The boost from higher import demand due to expansionary fiscal policies will likely overwhelm the adverse impact of targeted tariffs on Japan. The US is Japan’s biggest goods export destination, accounting for 20% of total. Most traded items such as machinery and automotives are set to benefit from higher investment demand and consumer spending.
The Bank of Japan kept its policy rate at 0.25% at Thursday’s meeting, as we expected. We believe that the central bank will raise the policy rate to 0.5% in January 2025 and to 0.75% after confirming the strong outcome of the Spring Wage Negotiation next year, most likely in July.
We’ve adopted our “limited Trump scenario” as our baseline forecast for Japan. We now assume that the US will impose targeted tariffs on Japan’s exports, among several other economies. We think these measures will have a limited impact on overall growth, but globally higher trade barriers are likely to hit Japanese manufacturers’ profitability and financial markets. In addition, there is a non-negligible risk that Trump could implement even stricter tariffs.
We now believe that the Bank of Japan will wait until January to hike the policy rate. We previously assumed a 60% chance of a hike at the meeting on December 19, but recent media reports signal that more board members will likely prefer to wait to see more data to confirm the momentum of wage-driven inflation and US policy developments.
u live in interesting times in US
The first release of the November baseline incorporated the election outcome, but in interesting and uncertain times, our baseline assumptions require more frequent updates to stay current with the evolving balance of risks.
Amid the fast-progressing electric vehicle (EV) shift, maintaining high competitiveness in auto-related sectors and ensuring a smooth labour transition across industries are crucial for the growth of the Japanese economy. As auto production shifts towards EVs, which require different inputs from traditional internal combustion engine cars, parts suppliers will need to adapt to avoid losing market share to foreign players. Change in automotive supply chains would also require workers to move across different industries, a task particularly challenging for Japan.
The ruling Liberal Democratic party and its partner Komeito lost their majority in Japan’s lower house elections on Sunday, which means the two parties will likely be forced to manage the government as a minority ruling coalition.
Labour turnover is quickly rising among full-time workers in Japan, where long-term employment has been prevailing. Although a serious labour shortage and a sharp rise in labour turnover will provide a great opportunity and incentive for productivity improvement, we this this will occur only gradually.
The Bank of Japan maintained its policy rate at 0.25% during Friday’s meeting. Although we still expect an additional rate hike this year, we now expect that it will take place in December rather than October, given the updated political calendar and the recent yen strength.
We now expect the Bank of Japan will implement an additional rate hike this year, possibly in October, given the hawkish forward guidance at the July meeting. We previously projected the central bank would wait until next spring to hike again. Thereafter, we expect the BoJ to become more cautious and raise rates only once per year in 2025 and 2026 to reach a terminal rate of 1%.
Our new proprietary business cycle phase indicator points to a trough in sight for industry, but with dispersion among sectors. High tech is leading the pack with output firmly on its way up. While most other sectors have yet to reach a cyclical trough, we believe they are now closing in.
Abrupt yen appreciations have been associated with, or preludes to, global financial instability. So far, the recent yen surge has had only moderate spillovers to global financial markets, which should not have significant macroeconomic effects. But the episode is not necessarily over and the possibility of further yen gains is a distinct risk.
We estimate that Japan’s nominal neutral interest rate – the rate consistent with monetary policy that is neither stimulative nor restrictive – has risen somewhat since 2022, marking a striking reversal from its decades-long slide. More importantly, we project it to continue rising gradually, to around 1% by 2030 from 0% in 2023.
At Wednesday’s policy meeting, the Bank of Japan (BoJ) raised the policy rate to 0.25% without clear evidence of wage-driven inflation in wage and consumption data. Although CPI has stayed above 2%, the core-core CPI (excluding energy and fresh foods) has been easing.
At the July policy meeting, the Bank of Japan (BoJ) will reveal its plan for reducing JGB purchases over the next one to two years. We project that the BoJ will reduce monthly JGB purchases by ¥0.5trn every quarter, from the current ¥6trn, to impress a “sizeable reduction” on the market, while avoiding a sharp rise in yields by stressing flexibility and predictability.
Private consumption growth in the Philippines has slowed to its lowest rate since 2010 outside the pandemic period. The main culprit is worsening confidence, which has been hit particularly hard by persistent inflation. Although inflation should subside later in the year, the impact on consumer sentiment will take time to feed through, so we don’t expect a substantial boost in spending this year.
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