TOKYO :Japan’s government cut this year’s economic growth forecast but expects inflation to sharply exceed the central bank’s 2 per cent target in new projections released on Thursday, acknowledging growing signs of change in the country’s deflationary mindset.
The estimates come ahead of the Bank of Japan’s closely watched policy meeting next week, when the board will produce its fresh quarterly forecasts and debate how much progress the economy is making in sustainably meeting its 2 per cent price target.
“Japan’s economy is recovering moderately” with positive signs emerging, such as steady wage hikes and strong corporate spending appetite, Prime Minister Fumio Kishida said.
“It’s important to ensure Japan makes steady progress in exiting deflation, and shift to a society where wage hikes become a norm,” he told a meeting of the government’s top economic council on Thursday.
In a mid-year review of its forecasts, the government expects the economy to expand 1.3 per cent in the current fiscal year ending in March 2024, down from 1.5 per cent projected in January, due to the hit to exports from slowing global demand.
But it also expects robust consumption and capital expenditure to underpin growth, projecting a 1.2 per cent expansion in fiscal 2024.
Overall consumer inflation, which does not strip away any item, will likely hit 2.6 per cent this fiscal year, the government said, higher than 1.7 per cent projected in January and exceeding the Bank of Japan’s 2 per cent target.
The government expects inflation to hit 1.9 per cent in fiscal 2024.
After more than two decades of deflation and stagnant wage growth, Japan has seen inflation exceed the central bank’s 2 per cent target for more than a year as firms continued to pass on rising raw material costs to households via price hikes.
Companies also offered pay hikes unseen in three decades at this year’s wage negotiations with unions, heightening market expectations of a tweak to the BOJ’s yield curve control (YCC) policy that caps long-term interest rates around zero.
BOJ Governor Kazuo Ueda has brushed aside the chance of a near-term exit from ultra-loose policy, arguing that the recent cost-driven rise in inflation must be replaced by price gains driven more by robust domestic demand and higher wage growth.
But an upgrade to its inflation forecasts will likely keep alive market expectations that Ueda will soon phase out his predecessor’s massive stimulus programme.
In its most recent forecasts made in April, the central bank expects core consumer inflation – which strips away the effect of fresh food costs – to hit 1.8 per cent in the current fiscal year and 2.0 per cent in the following year.
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