Outlook for Japanese Economy Ahead of the BOJ Meeting – Introduction
Japan is the third biggest economy in the world with a Gross Domestic Product (GDP) of more than $4.82 trillion and a population of more than 126 million people. The country is known around the world for a number of reasons. First, it is known for its industrial base, which makes it a key manufacturer of automobiles and other electronic products like televisions and gadgets.
Second, the country is known for its large overseas holdings. For example, it is the second largest holder of American debt, with holdings currently worth more than $1.3 trillion. This characteristic makes the yen one of the major safe haven currencies that traders rush to in times of increased volatility.
Third, the country is known for its hardworking people, who rarely take vacations. On average, Japanese people work for more than 80 hours a week. This characteristic has made it extremely difficult for the Bank of Japan to normalize interest rates because of the low rate of inflation. Contrary to the popular belief, a low rate of unemployment rate does not lead to high inflation rate in Japan. This is simply because Japanese don’t indulge in spending even when their salaries rise. They save.
Fourth, the country is known for its aging population. In fact, Japan is the only country in the world that is seeing its population decrease. In 1990, the country’s population was more than 120 million. Today, it has increased to 126 million, a relatively low rate of growth. The reason for this is that Japanese are afraid of giving birth because of the high cost of living in the country. By 2040 and 2050, the population is expected to shrink to 107 million and 97 million respectively. Experts believe that increased immigration to the country would help stabilize the economy.
As one of the largest economies in the world, Japan was hit hard during the global financial crisis. In response, the bank decided to slash the interest rates in a bid to stir activity in the private sector. It was also intended to stimulate inflation. With no inflation in sight, the country then decided to take interest rates to the negative category. The negative rates too have not stimulated inflation, which remain at low levels.
Therefore, when the Bank of Japan meets later this week to make decisions on interest rates, the bank is not expected to make any changes. This puts the bank at a major risk at a time when the economic growth is expected to slow down. This is because in case of a major global recession, the bank will not have the tools in place to deal with the crisis. The Fed on the other hand, would have the tools because it has done a number of hikes in the past few years. In this meeting, the bank is also expected to provide guidance on the future of rate hikes and the how far it will leave the flexibility of the long term government bonds. Some bank officials have cautioned that this flexibility is risky for the markets.