As a top economist on Tuesday warned of Japan going into recession, the country’s central bank vowed to continue with the policy of maintaining low interest rates.
“We think the Japanese economy will enter a recession sometime next year,” Marcel Thieliant, senior Japan economist at Capital Economics, said, reported CNBC.
Thieliant said the recession would “mostly be driven by a drop in exports and also by becoming more cautious, which is typically what you see when exports start to fall,” he said.
In October, Japan reported a higher-than-expected trade deficit of $15 billion as exports rose by 25.3 percent, slower than a year-on-year growth of 28.9 percent seen in September.
On the other hand, imports jumped 53.5 percent in the said month, higher than a year-on-year growth of 45 percent the previous month.
Japan is also due to release revised third quarter GDP on Thursday with analysts expecting a 1.1 percent annualized contraction for the July to September period – after seeing a 1.2 percent contraction the previous quarter.
That would mean it’s already headed for what is commonly categorized as a technical recession, defined as two consecutive quarters of negative growth.
However, the National Bureau of Economic Research defines recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Thieliant said the Bank of Japan was likely to maintain its ultra-dovish monetary policy and won’t start raising benchmark interest rates, especially amid recessionary concerns. “In that environment, it would be very brave to tighten monetary policy.”
Bank of Japan (BOJ) Governor Haruhiko Kuroda reportedly brushed off the possibility of reviewing the current stance of maintaining low interest rates.
“The bank has indicated that it wants to see sustainable inflation and the kind of cost-push inflation that we are seeing now is not sustainable,” Thieliant said.
Japan’s core inflation for November came in at 3.6 percent, the highest in 40 years and higher than the BOJ’s target of 2 percent.
Spending is increasing
Despite forecasts of a contraction in growth, Japan’s household spending has been consistently on the rise, and grew 1.2 percent in October compared to a year ago. It marked a fifth consecutive month of gains since falling 0.5 percent in May.
This is also expected to show some sluggishness, according to Thieliant, who said real wages in the nation will eventually impact the wider consumption activity.
“The recovery in spending will have to slow as these households get hit by real incomes,” said Thieliant, as the nation saw sharpest contraction in real wages in more than seven years.