Japan raises growth forecasts and maintains rates at 30-year highs

Source: CritpoTendencia Original Title: Japan Raises Growth Forecasts and Maintains 30-Year High Rates Original Link: The Bank of Japan raised its economic growth forecasts while deciding to keep its benchmark rate unchanged at 0.75%, the highest level in three decades. The signal comes at a politically sensitive time, as the country heads toward snap elections that could redefine the balance between monetary policy and fiscal stimulus.

The monetary authority revised upward its growth estimate for the fiscal year ending March 2026, raising it to 0.9% from the previous 0.7%. It also improved its projection for 2026, up to 1%, from the 0.7% estimated in October. The adjustment aims to reinforce the message of resilience, even as recent activity data show mixed signals.

Upward revised growth, weaker activity data

Recent GDP figures indicated that the Japanese economy contracted more than expected in the third quarter, with a quarterly decline of 0.6% and an annualized drop of 2.3%. This divergence between official projections and hard data reflects Japan’s challenge: advancing monetary normalization after years of extraordinary stimulus without halting a still fragile recovery.

The rate decision was adopted by 8 votes to 1. During the meeting, board member Hajime Takata proposed raising the interest rate to 1%, considering that risks to prices are skewed to the upside.

Political pressure and elections on the horizon

Since March 2024, Japan has abandoned its negative rate regime and begun a gradual normalization process, conditioned on a virtuous cycle between wages and prices. However, this course faces increasing political pressure. Prime Minister Sanae Takaichi has intensified her rhetoric in favor of lower rates and greater fiscal support to sustain growth.

The government is pushing a record budget of $783 billion for the next fiscal year, adding to a stimulus package of $135 billion approved last year to mitigate the impact of living costs. This approach has heightened market concerns about the fiscal trajectory.

Weak yen, rising yields, and focus on stability

Despite monetary tightening, yields on Japanese bonds have risen to multi-decade highs, favoring capital outflows and pressuring the yen. The currency has depreciated about 4.6% against the dollar since late October, hovering around 158.61, in a context where real rates remain negative and fiscal doubts persist.

Finance Minister Satsuki Katayama warned about unilateral movements in the exchange rate and assured that the government monitors markets with a high sense of urgency. Meanwhile, ING analysts noted that the market’s focus will be on how Governor Kazuo Ueda assesses the impact of yen weakness on inflation.

With Japan heading to the polls on February 8, the delicate balance between monetary policy, fiscal pressure, and exchange rate stability becomes a key factor not only for Tokyo but for all of Asia, which closely watches every signal from the Bank of Japan.