Middle East tension, AI demand shape Japan's outlook

The Bank of Japan's Policy Board convened in late April, noting that overseas economies experienced moderate growth, albeit with some weakness attributed to the Middle East situation.

Projections suggest initial downward pressure from these geopolitical factors, followed by a moderate recovery, partly driven by global AI-related demand.

Japan's economy itself showed moderate recovery but is expected to decelerate temporarily.

This slowdown is linked to production adjustments due to logistics bottlenecks, a deterioration in terms of trade from surging energy and raw material prices, and the ongoing impact of the Middle East situation.

However, solid global AI-related demand and government measures are anticipated to provide some support.

In market operations, the BOJ reduced its monthly Japanese government bond (JGB) purchases by 200 billion yen in April, bringing the total to approximately 2.7 trillion yen per month, consistent with its June 2025 reduction plan.

The uncollateralized overnight call rate remained stable around 0.75 percent during the intermeeting period.

Financial markets saw modest TOPIX gains, with 10-year JGB yields increasing from inflationary pressure.

The yen was flat against the U.S. dollar but depreciated against the euro.

Industrial production remained stable, influenced by geopolitical instability, supported by global AI demand and business fixed investment.

Corporate profits stayed high, though U.S. tariff policy impacted manufacturing.

Private consumption, resilient from improved employment and income, is expected to decelerate due to rising energy prices.

Labor market conditions remained tight, with steady nominal wage increases.

Elevated crude oil prices accelerated the producer price index (PPI).

Consumer price index (CPI) growth moderated to 1.5-2.0 percent, partly due to energy subsidies, and inflation expectations rose moderately.