The Japanese government maintained a cautiously optimistic stance on its economy in its monthly report released on Thursday, while cautioning about downside risks related to U.S. trade practices. The Cabinet Office's assessment for January reaffirmed that Japan's economy, the fourth largest worldwide, is experiencing a moderate recovery phase but emphasized the potential negative ramifications of U.S. policies, particularly on the automotive industry.
Private consumption, which constitutes over half of Japan's economic activity, was described as "picking up" for the fifth month in a row, sustaining the outlook unchanged. The trade and services balance experienced the only significant revision, shifting from a deficit to a "roughly balanced" position, signaling some improvement in external trade dynamics.
Regarding inflation, the report noted that food price increases, a principal factor fueling inflation, have begun to slow. The government intends to monitor these trends carefully to determine if the deceleration in price growth will be sustained. However, the sharp depreciation of the yen since October has intensified uncertainty about whether the easing of cost-driven price pressures will occur as smoothly as the Bank of Japan forecasts.
Japan's economy contracted at an annualized rate of 2.3% in the third quarter, marking the first decline in six quarters. This downturn was mainly attributable to a decline in exports stemming from elevated tariffs, affecting trade performance. In this context, the Bank of Japan is anticipated to maintain its interest rates at their current level during its two-day meeting ending Friday, following a recent increase to a 30-year high of 0.75%.
Contributing to economic uncertainties are recent political developments. Prime Minister Sanae Takaichi's announcement of a snap parliamentary election scheduled for February 8 aims to seek public approval for her policy initiatives, including plans to boost government expenditure and temporarily suspend the consumption tax on food for two years. These proposals have triggered broad market sell-offs across bonds, currencies, and equities, amid apprehensions about worsening Japan's already vulnerable public finances.
This economic report highlights the ongoing balancing act between recovery momentum and risks emerging from external trade tensions and internal political shifts, influencing Japan's financial markets and fiscal outlook.