The Bank of Japan will begin two days of interest rate reviews today, which it will announce along with fresh quarterly economic growth and inflation projections on Wednesday.
Today’s meeting follows the first downgrade of Japan’s economy in three years, a result of weak exports, slowing domestic consumption and rising international risks. Japan has found itself particularly exposed to slowing demand for its electronic parts and capital goods from China—a result of US-China trade tensions.
However, the biggest problem facing the BOJ remains weak inflation. The central bank has struggled to reach its 2% target via a concerted policy of enormous monetary stimulus, zero-and-negative interest rates, and domestic investment. While some policymakers have called for an increased stimulus, the BOJ has held off on immediate action, since Japan’s output gap—the difference between an economy’s actual and potential outputs—has remained positive at 2.2%, which should put upward pressure on inflation.
The BOJ is likely to cut economic projections in its announcement tomorrow, while maintaining its stimulus package and leaving base interest rates unchanged at -0.1%. However, the weak economic outlook could fuel calls for the government to delay a nationwide sales tax hike scheduled for October. Ultimately, the strength of the Japanese economy over the medium-term depends heavily on the outcome of US-Chinese trade talks and Japan’s ability to strike a US trade deal of its own.
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Josh analyses the economic impacts of geopolitical developments in emerging economies. He contributes regularly to The Daily Brief.