Japan’s neutral interest rate is rising, but not by much
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.
What you will learn:
- Higher inflation expectations are one of the main reasons behind the recent increase in the nominal neutral rate. We believe that inflation expectations will continue to slowly edge up in the coming years amid robust wage gains, contributing to the projected neutral rate’s rise.
- Stripping out inflation expectations, the real neutral rate has risen only modestly in recent years. We think Japan’s demographic headwinds and weak productivity growth all but banish a sustained return to positive real neutral rates throughout our forecast to 2050. But in the next few years, increases in net foreign assets and the Bank of Japan’s step down in quantitative easing are likely to drive the rate slightly higher.
- Neutral rate estimates are inherently uncertain. Still, our approach provides a framework that can inform our view of the path for long-run interest rates, and our sensitivity and scenario analyses offer a useful gauge of the risks around our estimates.
Tags:
Related Posts
Post
Trump policies provide tailwinds for industries, with exceptions in Japan
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.
Find Out More
Post
Japan expects mixed impacts from Trump’s second presidency
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.
Find Out More
Post
Japan’s BoJ outlook update – Rate hike is now more likely in January
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.
Find Out More