Japan faces a long period of low growth

Japan looks set to see a long period of low growth and weak yen as the US Federal Reserve, a major central bank in their aggressive monetary tightening, is expected to continue to raise interest rates, probably slowly but at higher than expected levels. if you thought before.

A massive economic stimulus package with a total fiscal spending of 39 trillion yen unveiled last month is widely expected to support the economy at a time when rising energy, commodity and food prices threaten. to derail a recovery from the COVID-19 pandemic, although many Economists are skeptical that it will increase the world’s third largest economy.

Intense selling pressure on the yen appears to have eased in recent days, with the yen trading in the 145-149 range against the US dollar, partly due to persistent caution on yen buying interventions by Japanese authorities which are consistent in their warnings that they will counteract excessive volatility.

The strong depreciation of the currency towards 160 against the dollar may be unrealistic, but its gradual weakening is likely to be in sight as the accommodative Bank of Japan is unlikely to have a budget, currency analysts say, leaving import costs high.

Faced with the collapse of public support, Prime Minister Fumio Kishida has given the green light to an economic package that seeks to alleviate the pain of accelerating inflation by reducing household bills. This will keep Japan in a rush for fiscal spending even as its national debt is more than double the economy.

“The government should extend support to households and businesses by increasing fiscal spending when commodity prices and the weaker yen are not something it can control,” said Saisuke Sakai, senior economist at Mizuho Research & Technologies.

“But such measures are only effective to stop the bleeding. Japan must improve the structural durability of the economy at higher costs by promoting wage growth and other long-term means,” Sakai said.

The package would boost the economy by a mere 0.1% in the current fiscal year to next March and by 1.1% in fiscal year 2023, according to the institute, which predicts the dollar could rise to 155. yen this year.

The Japanese economy has experienced a modest recovery trend after suffering a severe blow from the COVID-19 pandemic. However, private sector economists expect growth to slow to 1.2% in the July-September quarter after growing at an annualized rate of 3.5% in real terms in the previous quarter. Official data will be released on November 15th.

The government expects the economic package to increase real GDP by 4.6%, with its inflation-reducing measures likely to reduce basic consumer prices by at least 1.2 percentage points. The CPI, which excludes volatile fresh food, has already passed 3%, well above the central bank’s 2% target, and economists say it will increase further towards the end of the year. year.

Amid the rising cost of living, BOJ Governor Haruhiko Kuroda has faced mounting criticism from opposition lawmakers in parliament that the government and the bank are heading in opposite directions, with the former going in opposite directions. scrambling to curb inflation and stop the yen from falling as the BOJ is accelerating them by persisting with ultra-low rates.

The reason the central bank sticks to ultra-low rates is that higher commodity prices are adding downward pressure on the economy because Japan is heavily reliant on energy imports. A weak yen, a by-product of monetary easing, inflates import costs.

Japan has so far seen 20 trillion yen worth of revenue exiting the nation due to rising import costs from the pandemic. According to Junichi Makino, chief economist of SMBC Nikko Securities Inc., the figure will reach 30 trillion yen by September, at the end of the phases related to energy, corresponding to the size of the fiscal expenditure.

For its part, the US central bank is expected to continue raising interest rates after continuing with its fourth 0.75 percentage point hike in Wednesday’s policy meeting, with inflation remaining stubbornly high.

“The question of when to moderate the pace of hikes is now far less important than the question of how high to raise rates and how long to keep monetary policy tight,” Fed chief Jerome Powell said in a post-Federal press conference. Open Market Committee meeting.

Eyes are on when the rising trend in US Treasury yields and the weakness of the yen against the dollar will be reversed as the Fed slows the pace of monetary tightening.

Takahide Kiuchi, executive economist at the Nomura Research Institute who was a board member of the BOJ, said a sticking point is when financial markets expect a 0.25 percentage point increase.

“The timing would be after the FOMC meeting in December at the earliest and in the January-March period at the latest,” Kiuchi said. “If so, the dollar-yen pair won’t reach 160 yen.”

A less aggressive Fed can help lower the alert among authorities about the rapid depreciation of the yen. But that could also mean that US economic growth is slowing, a bad thing for trading partners like Japan. Finance Minister Shunichi Suzuki said before the Fed meeting that a “slow” weakening of the yen, not just its excessive volatility, was a cause for concern.

Japanese politicians are hoping that a projected recovery in inbound tourists will help become a quick – and visible – boost for the Japanese economy, putting in place the economic package to curb inflation, partly driven by the weaker yen.

“It is a worrying trend that government policy is increasingly focused on providing money to households and businesses and the magnitude of fiscal spending comes first,” said Takuya Hoshino, senior economist at the Daiichi-Life Research Institute. “How this money should be spent to maximize its impact is more important,” Hoshino added.