Economists generally believe that the Bank of Japan may announce a 25 basis point interest rate hike at its policy meeting this Friday. The recent hawkish remarks by Governor Kazuo Ueda and Deputy Governor Nobuyuki Himiya are seen as significant signals of impending tightening measures.
Weak Yen and Inflation Pressure
Since the Bank of Japan decided to hold its position in December, the yen has continued to weaken. Meanwhile, consumer, producer, and import prices have all risen more than expected, further necessitating policy adjustments. Economists point out that the recent series of inflation data indicates greater price pressures on the Japanese economy, although demand-driven price increases remain relatively limited.
The Consumer Price Index (CPI) expected to be released this Friday is projected to show a continued rise in the annual inflation rate. Nevertheless, deeper indicators may reveal that actual demand is still a weak driver of inflation. This keeps the market keenly focused on whether the Bank of Japan will pursue further tightening measures.
Challenges of Wages and Consumption
The persistence of inflation alongside the deceleration of nominal wage growth has resulted in a recent downward trend in real wage levels. Economists predict that real wages may continue to decline in the coming months, thereby hindering growth in consumer spending and the Gross Domestic Product (GDP). As household purchasing power diminishes, consumer confidence may face increasing pressure.
Economists add, "The decline in real wages will reduce household disposable income, thus limiting consumption capability, which could further slow GDP growth." Meanwhile, whether the Japanese economy can emerge from its long-standing low inflation and low growth predicament will depend on the effectiveness of the central bank's policy adjustments.
Market Reaction and Outlook
If the Bank of Japan announces a rate hike on Friday, it will be a significant step in further withdrawing from ultra-loose monetary policy and could also temporarily strengthen the yen exchange rate. However, economists warn that a rate increase might further compress consumer spending capabilities, posing short-term challenges to economic recovery.
Market analysts believe that the Bank of Japan's policy direction will impact global financial markets, especially currency and bond markets. Investors need to closely monitor the statement following Friday's policy meeting to assess Japan's future economic trajectory and policy space.
