Japan’s central bank likely to ‘wait and see’ as tax hike generates uncertainty

The Bank of Japan concludes a two-day monetary policy meeting today with an interest rate announcement. Governor Haruhiko Kuroda is

japan consumption

Photo: Andrew Lee

The Bank of Japan concludes a two-day monetary policy meeting today with an interest rate announcement. Governor Haruhiko Kuroda is expected to announce that rates will be held at -0.1%. This is primarily due to domestic consumption—responsible for around 60% of Japan’s GDP—remaining solid in the three months to July.

However, Japan’s economy faces uncertainty in the coming months. In particular, an increase in consumption tax from 8% to 10% set for October 1 has generated concern that consumption could decrease—potentially causing the economy to contract after expanding at an annualised rate of just 1.3% in the second quarter. However, there has been no sign of consumers trying to beat the change by binge spending, suggesting they remain unphased by the tax hike.

Today’s decision reflects a wait-and-see approach. If Japan’s economic growth remains sluggish or its inflation rate—currently 0.8%—remains well below the 2% target, further monetary easing should be expected. That would most likely take the form of a rate cut before the end of the year.

However, prolonged monetary easing faces diminishing returns. As Japan has been easing its monetary policy for around six years, future rate cuts may not be effective in stimulating the economy.

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