Himino assesses Japan's economy, cautious on 2% inflation
Bank of Japan Deputy Governor Ryozo Himino discussed Japan's economic activity, prices, and monetary policy in Wakayama. He presented a macroeconomic model and assessed the current state of the economy and inflation.
US resilience boosts Japan's outlook
Bank of Japan Deputy Governor Ryozo Himino outlined Japan's economic activity, noting that GDP fluctuates around potential GDP due to demand shocks and financial conditions.
The Bank's January 2026 Outlook Report projected moderate growth, supported by overseas economies and government measures.
Initially, the Bank revised down fiscal 2025 and 2026 GDP growth forecasts from around 1 percent following US tariff announcements last April.
However, these projections were later adjusted upward, returning to pre-tariff levels, as the demand shock proved less severe than anticipated.
This was primarily due to the unanticipated resilience of the US economy.
US firms absorbed a significant portion of tariff burdens, preventing a major slowdown in consumer spending.
Additionally, AI-related investment by hyperscale tech firms in the United States skyrocketed, positively impacting direct exporters and subcontractors in Japan, from data center air conditioners to semiconductor manufacturing equipment.
This demonstrated spillover effects across regions and industries, contrary to earlier beliefs that Japan might struggle to benefit from the AI boom.
Mixed signals on Japan's supply capacity
Japan's GDP gap is estimated around zero, implying balanced labor and capital.
Yet, the Tankan survey reports strong business conditions and severe labor shortages, especially in nonmanufacturing, indicating strained supply capacity.
This contrasts with a low Consumer Confidence Index, reflecting public skepticism about economic strength.
This duality may arise from growth within a shrinking population, creating a sense of supply shortage alongside stagnation.
On prices, the inflation rate is influenced by the GDP gap and supply shocks.
The BoJ estimates fiscal 2025 inflation (excluding fresh food) at 2.7 percent, driven by food prices.
With other goods/services stable and a near-zero GDP gap, food-specific supply shocks are seen as the main cause.
The January CPI deceleration to 2.0 percent supports the Outlook Report's forecast of inflation falling below 2 percent in the first half of the year.
2% target: Premature to assert
Underlying inflation, which excludes temporary shocks, is measured through various methods including filtering volatile effects and estimating expectations.
Himino noted that overall, these measures provide reasonable confidence that underlying inflation has been steadily rising.
However, he concluded that asserting the rate has definitively reached the 2 percent price stability target may still be premature.