Forecasting moderate economic growth but ebbing inflation, the Bank of Japan kept its key short-term policy rate unchanged at 0.25%, as widely anticipated. For the fiscal year ending April 1 of next year, the central bank projected the nation's gross domestic product (GDP) to expand by 0.6% on year, while the core consumer price index (which excludes fresh food) is expected to rise by 2.5% on year. Looking ahead to fiscal 2025, starting April 1, Japan is poised for more robust GDP growth of 1.1% on year, with inflation anticipated to average 1.9% on year. The Bank of Japan maintains a 2% annual target for the core CPI.
However, recent figures revealed that Tokyo’s core CPI recorded a lower-than-target increase of 1.8% on year for October. This metropolitan CPI is often viewed as a precursor to the national CPI report, due later in November. Like many other nations, Japan encountered inflationary pressures during and following the pandemic era, with a peak inflation rate of 4.3% recorded in January 2023.
Since that time, inflation has moderated to the mid-2% range on a national scale. In response to above-target inflation, the Bank of Japan shifted this year from modestly negative short-term rates to the 0.25% rate in July. Additionally, the central bank has curtailed its quantitative easing (bond-buying) programs and raised the target interest rate on 10-year government bonds to about 1% from near-zero levels. Nevertheless, Bank of Japan officials have reiterated their commitment to fostering more robust real wage growth in Japan, believing this will enhance domestic consumer spending and consequently drive better overall economic growth.
A series of rate hikes by the central bank could potentially dampen labor demand and, consequently, pressure wages. In a prepared statement, the Bank of Japan asserted, 'Japan's economy is likely to keep growing...with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies.' Additionally, the central bank noted that corporate profits have improved, business sentiment remains favorable, and business fixed investment is on a moderate upward trend. Yet, threats to the Japanese economy primarily originate from international factors, including volatile commodities prices and ongoing geopolitical tensions, as highlighted by the Bank of Japan..