In light of tariffs, the BoJ’s rate hike forecast which views the weak JPY as a problem would recede, and to accommodate the damage through expansion in domestic demand, burden from weak JPY would be supported by fiscal policy. If Prime Minister Ishiba, who is finding it increasingly difficult to maintain his administration due to a sharp decline in public support as a result of a major blurring of policy lines and other factors, were to blur again from his pet policy of fiscal soundness and take steps to reduce the consumption tax rate to reduce the burden of the weak JPY on households, the possibility of a recovery in public support and the ability to maintain power would increase.
The BoJ argues that the supply-demand gap cannot explain inflationary pressures. The understanding is that the supply-demand gap is small but inflationary pressures are growing stronger because equipment cannot be moved due to labour shortages. If the BoJ is correct, then in order to stabilise inflationary pressures, equipment must be renewed and expanded to avoid labour shortages. Since lower interest rates are better for fixed investment, the BoJ is explaining the rate hikes with the reason for the rate cut. All enterprises all industries fixed investment plans are at +6.3% (our seasonally adjustment), a slowdown from previous +8.1%. The trend is weaker among nonmanufacturers and SMEs, which are more in need of updating and expanding their facilities. If the BoJ had not been so lenient on hiking rates, there would have been more updating and expansion into facilities that require less manpower, the upward pressure on prices due to supply-side factors would have been suppressed, and the rate of real wage growth would already have been clearly positive.
If the Trump administration’s tariff hikes reduce auto and parts production and make it more difficult for firms to finance their capital needs, it will be even more difficult for them to renew and expand required facilities. SMEs are now at a point where they need to be vigilant, as they are vulnerable to a chain reaction of bankruptcies due to a loss of cash flow. The government has begun to consider countermeasures including financial supports against the deterioration in corporate cash flow caused by the decline in automobile and parts production brought about by the Trump administration’s tariff hikes. It appears that the BoJ, which is required by the BoJ Act to manage monetary policy consistent with the government’s economic policy direction, can no longer make it difficult for companies to fund their operations by hiking the policy rate during the year.
The employment condition DI for all industries of all enterprises for Q125 is - 37, indicating a large labour shortage. Changes in the sense of labour shortages are a good indicator of changes in business conditions. The YoY difference in the DI for employment conditions has been found to have a strong correlation with the YoY change in real GDP. The YoY difference in the DI for Q125 was -1, continuing its slowdown trend. This is consistent with the fact that real GDP growth in 2024 was almost 0%, well below the potential growth rate, which is estimated to be around +0.6%. Weak domestic demand and the downward pressure on production from the Trump administration’s tariff hikes have led to a risk of two consecutive quarters of negative real GDP growth (QoQ) in Q125 and Q225. Even though the weak JPY would become a ‘nest egg’ and there’s a need to renew and expand facilities due to labour shortages, the direction of business conditions is at risk of turning for the worse due to weak domestic demand and the downward pressure on production from the Trump administration's tariff hikes. The current state of the Japanese economy is bad, and the BoJ is not expected to be able to hike its rates at a time when the government is trying to boost the economy through additional economic stimulus measures
The BoJ’s tankan survey of all enterprise manufacturers for Q125 showed the DI for business conditions in the manufacturing sector to be +7, slightly down from +8 in Q424. This is consistent with the weak forecast of industrial production index for Q125, which is expected to be flat +0.0% QoQ. Uncertainty over the Trump administration’s tariff hikes is strong, indicating a deterioration in the outlook DI from previous +5 to Q1 +4. While this indicates a continued deterioration in the DI going forward, the impact of the Trump administration’s tariff hikes has not yet been factored in entirely. The fact that USD/JPY is weaker than the assumed rate of USD/JPY147.1 (all enterprise all industries, FY25) is preventing business confidence from getting worse. The level of JPY weakness has changed from a ‘problem’ to a ‘nest egg’ as the Trump administration’s tariff rate hikes require a buffer. With the buffer of a weaker JPY, the auto industry may be able to continue domestic production without having to raise prices significantly in the US in response to higher tariff rates. In light of tariffs, the BoJ’s rate hike forecast which views the weak JPY as a problem would recede, and to accommodate the damage through expansion in domestic demand, burden from weak JPY would be supported by fiscal policy. If Prime Minister Ishiba, who is finding it increasingly difficult to maintain his administration due to a sharp decline in public support as a result of a major blurring of policy lines and other factors, were to blur again from his pet policy of fiscal soundness and take steps to reduce the consumption tax rate to reduce the burden of the weak JPY on households, the possibility of a recovery in public support and the ability to maintain power would increase.
The DI for all enterprise nonmanufacturing companies in Q125 was +21, improved slight from +22 in Q424. Compared to large manufacturing firms, non- manufacturers and SMEs are not cash rich, and the BoJ’s premature rate hike in January caused the DI for SME lending attitudes, which indicates credit cycle activity, to fall from the peak +21 in Q119, to +13 in Q125. If the weakening of the credit cycle exert downward pressure on business confidence in the nonmanufacturing sector, range bound DI would have a risk to deteriorate. Inbound activity is strong, but business capacity is constrained. Inbound business is expected to remain a significant contributor to the level of GDP, but would no longer contribute to economic growth. The ratio of current profit to sales for large enterprises, which indicates the economic cycle, has peaked.
The BoJ argues that the supply-demand gap cannot explain inflationary pressures. The understanding is that the supply-demand gap is small but inflationary pressures are growing stronger because equipment cannot be moved due to labour shortages. If the BoJ is correct, then in order to stabilise inflationary pressures, equipment must be renewed and expanded to avoid labour shortages. Since lower interest rates are better for fixed investment, the BoJ is explaining the rate hikes with the reason for the rate cut. All enterprises all industries fixed investment plans are at +6.3% (our seasonally adjustment), a slowdown from previous +8.1%. The trend is weaker among nonmanufacturers and SMEs, which are more in need of updating and expanding their facilities. If the BoJ had not been so lenient on hiking rates, there would have been more updating and expansion into facilities that require less manpower, the upward pressure on prices due to supply-side factors would have been suppressed, and the rate of real wage growth would already have been clearly positive.
