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Bank of Japan Out Evaded Recession, But It Might Be Not Enough

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Despite avoiding a recession, Japan’s economy rebounded much less than anticipated in the fourth quarter due to business investment declines, indicating the conflict that the Bank of Japan will confront in phasing out its exorbitant stimulus program. Private consumption remains steady amid obstacles from escalating living costs, but analysts suggest that global economic ambiguity will impede Japan’s slower-than-hoped revival from coronavirus damages.

There Is a Rebound But Less Than Expected

The world’s third-largest economy saw a mere 0.6% growth in the last quarter of 2020, according to data released by the government on Tuesday – far below market expectations for an increase of 2.0%. This minor rebound from July-September’s negative 1.0% decline was partly due to tumbling capital expenditure and inventory levels. “The rise after such a steep fall is less than impressive,” remarked Toru Suehiro, Chief Economist at Daiwa Securities

“We anticipate consumption to rise as service expenditures become more secure. Unfortunately, it is difficult to foresee a strong recovery due to the pressure of climbing inflation rates,” he stated.

Bank of Japan Might Change Policy

As Japan’s central bank prepares for the arrival of its new governor Kazuo Ueda, a difficult balancing act awaits. He must find a way to normalize BOJ policy without disrupting their fragile economic rebound. To ensure success, lawmakers are banking on consumers being able to sustain spending with their record pandemic savings long enough for wages to rise and offset rising food and fuel costs.

The Bank of Japan‘s 2% inflation target has been exceeded, so it is imperative to consider the economic and wage outlooks when assessing how soon they must discontinue their expansive stimulus program. Takeshi Minami, the chief economist at Norinchukin Research Institute, argues: “It may be difficult for them to normalize their ultra-easy policy this year since overseas economies are slowing. Thus, we anticipate that the Bank of Japan will have no choice but wait until 2024 before making any changes.”

Bank of Japan Might Change Policy

Recession Risk Still Continues

After concluding some of the harshest travel restrictions in October to mitigate the transmission of COVID-19, Japan has observed a surge in foreign travelers. This is proven by an annual economic boost from a 1.1% growth rate last year up to 2.1%. Minister Shigeyuki Goto assured reporters that with these positive developments, the economy will soon be on its way toward full recovery and stabilization.

After the data release, he warned that inflation and a worldwide economic slowdown were looming threats. Nevertheless, business investment has not been deterred; therefore, his outlook was still cautiously optimistic. In contrast to this view, however, certain analysts caution that international headwinds could potentially destabilize the export-dependent economy and restrain manufacturers from boosting salaries which would hinder any potential rebound.Even though many other advanced economies are already in recession, Japan is also likely to slip into one during the first half of this year. According to Darren Tay from Capital Economics, this is due to a sharp decline in business investment, and net trade will further amplify these effects.

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