BoJ to Maintain NIRP as Declining Real Wages Weakens Japan’s Economy

(Originally posted on December 8, 2023)

– Japan’s Q3 GDP was revised down to -2.9% annualized rate from the initial estimate of -2.1%
– October real wages declined by 2.3% year-on-year
– Declining long-term US interest rates reduce the risk of abrupt yen depreciation

The yen surged to JPY142 per US dollar overnight on speculation that the Bank of Japan (BoJ) will end the negative interest rate policy (NIRP). However, the weak GDP and wage data released on December 8 suggest that the central bank will most likely maintain its ultra-dovish monetary policy. Furthermore, the narrowing gap between the US and the Japanese interest rates will ease the pressure on the BoJ to raise interest rates to defend the yen, which recently weakened to near JPY152 per US dollar on November 13. The BoJ is scheduled to hold its next policy meeting on December 18 and 19.

The appreciating yen will also help to bring down inflation that depresses real GDP and wage growth because the yen cost of vital imported inputs such as energy, raw materials, and food will decline and improve the gross margins of most businesses.

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