Japan Week Ahead: BOJ Governor Ueda Repeats Board Will Have Serious Debate on Need for Follow-Up Rate Hike This Month

–Q2 GDP to Be Revised Up Slightly, August Producer Inflation to Show Elevated Costs

By Max Sato

(MaceNews) – About two weeks before the Bank of Japan’s next policy meeting on Sept. 17-18, Governor Kazuo Ueda sent out a cautious but suggestive message to the markets that he and his colleagues will have a serious debate on whether to raise interest rates this month as the economy appears set to stay on a moderate growth path and upside risks to inflation needs closer attention than before.

At a news conference on Friday in Asheville, North Carolina, where top financial policymakers from the Group of 20 industrialized and developing economies discussed global issues, Ueda said data released since the BOJ’s last meeting on July 30-31 had been “largely in line” with the growth and inflation outlook provided by the board in its quarterly report and through his press remarks.

In the report, the board maintained its projection that Japan’s economy should be back on a modest growth pace of just under 1% in 2027, backed by fiscal programs, “accommodative” financial conditions and global demand linked to artificial intelligence, after the Mideast conflict damped economic activity.

Ueda repeated the comments that he made on July 31 and one of his deputy, Ryozo Himino, on Aug. 27 that the BOJ board will consider the timing and pace of rate adjustment “by examining the likelihood of the baseline scenario of the outlook for economic activity and prices being realized, and the risks to the outlook, including the impact of the situation in the Middle East, the expansion in AI-related demand, and developments in foreign exchange rates.”

“We will then engage in thorough discussions at our next policy meeting onward by checking the developments in the economy, prices and financial conditions along this basic stance,” he said.

The board decided to leave the target for the overnight interest rate at 1% in an 8 to 1 vote in July after raising it from 0.75% in a 7 to 1 vote in June (the governor was absent for medical treatment).

Hajime Takata, a former Mizuho Securities executive, was the only board member who was opposed to keeping rates steady. He called for an immediate rate hike to 1.25%, arguing that the central bank has entered a new phase in which it needs to nimbly respond to upside risks to inflation caused by “demand shocks” from overseas and to changes in overseas financial conditions.

He basically repeated his view in his speech on Sept. 2 and a news conference the same day but also stressed that central bankers should stay flexible about the timing and pace of interest rate changes, instead of presuming that raising rates at a three-month interval would be better than the previously believed twice a year when inflationary pressures are creeping up.

Both government and BOJ officials appear to agree that they are not too concerned about weak Q2 GDP growth figures. The second reading of the GDP data is expected to show a slight upward revision on Tuesday while produce inflation data on Friday is forecast to indicate costs remained elevated in August.

Monday, Sept. 7
1400 JST (0500 GMT/0100 EDT Sunday, Sept. 6) The Bank of Japan releases July consumption activity index.

The supply-side indicator, which has a close correlation with revised GDP data, fell a real 1.7% on the month in June on a travel balance adjusted basis after rebounding 1.1% in May and climbing 1.9% in April. In the April-June quarter, the index posted a 1.3% rise on January-March, when it gained 0.7%.

Tuesday, Sept. 8
0830 JST (2330 GMT/1930 EDT Monday, Sept. 7) The Ministry of Health, Labour and Welfare releases preliminary July wages.

In revised June data, total monthly average cash earnings per regular employee in Japan jumped 4.0% on the year after 3.4% in May, scoring their highest pace of increase since 4.1% in December 2022. The key wage indicator has risen for four and a half years. Base wages rose a solid 3.5% in June after a 3.4% gain in May while the increase in one-time pay including bonuses accelerated to 4.7% from 3.5% and overtime pay was also up 3.4% vs. 2.8% the prior month. Real average wages posted their seventh straight gain but the pace of increase is slower at 2.2% in June following a 1.6% gain in May.

Tuesday, Sept. 8
0850 JST (2350 GMT/1950 EDT Monday, June 7) The Cabinet Office releases revised (second preliminary) GDP for April-June.
Mace News median: +0.4% q/q (range +0.3% to +0.7%) vs. Q2 prelim +0.3%; +1.6% annualized (range +1.3% to +2.7%) vs. Q2 prelim +1.1%; +0.9% y/y (range +0.8% to +0.9%) vs. Q2 prelim +0.7%

Japan’s GDP growth in the April-June quarter is expected to be revised up slightly in the second reading as business investment in equipment and software turned out to be firmer than initially estimated and the positive contribution of inventories held by the private sector was higher than previously reported. Private consumption is forecast to remain flat and public works spending is seen still down, albeit at a slower pace.

The gross domestic product is forecast to have grown 0.5% on quarter, or an annualized rate of 1.1%, higher than the initial reading of a 0.3% gain, or 1.1% annualized.

As the preliminary data showed last month, the economy likely posted its third straight quarterly expansion, led by external demand (exports minus imports), which is estimated to have lifted total domestic output by an unrevised 0.5 percentage point. It is largely due to a plunge in imports after the blockade of the Strait of Hormuz led to a sharp decline in crude oil shipped from the Mideast Gulf. Exports showed some resilience as the auto and steel industries had weather the initial impact of stiff U.S. tariffs.

The contribution of domestic demand is expected to come in neutral at +0.0 point, firmer than the preliminary estimate of -0.2 point. The median forecast for the decline in capital investment is a smaller 0.8% on quarter, revised up from a 1.2% drop. The positive contribution of private inventories is seen being revised up to +0.4 point from +0.3 point.

Private consumption, which accounts for about 55% of the total domestic output, is nearly flat, down an unrevised 0.0% on quarter, marking its first drop in eight quarters after showing a solid 0.5% gain in Q1.

In its monthly economic report for August, the Cabinet Office downplayed the weak Q2 GDP data. It said lower school lunch fees that households paid contributed to the slight drop in private consumption but that it was offset by higher government spending on school lunches. It also noted that a transfer of large-scale patent rights overseas resulted in lower capital spending at home but that was counted as an increase in exports.

Consensus forecasts for key components are quarter-on-quarter percentage changes except for domestic demand, private inventories and net exports, whose contributions are in percentage points. Preliminary figures are in parentheses.

GDP q/q: +0.4% (+0.3%); 3rd straight rise
GDP annualized: +1.6% (+1.1%); 3rd straight rise
GDP y/y: +0.9% (+0.7%); 8th straight rise
Domestic demand: +0.0 point (-0.2 point); flat after 2nd straight rise
Private consumption: -0.0% (-0.0%); 1st drop in 8 qtrs
Business investment: -0.8% (-1.2%); 2nd straight drop
Public investment: -0.6% (-0.1%); 1st drop in 2 qtrs
Private inventories: +0.4 point (+0.3 point); 1st rise in 5 qtrs
Net exports (external demand): +0.5 point (+0.5 point), 3rd straight rise

Tuesday, Sept. 8
1400 JST (0500 GMT/0100 EDT Monday, Sept. 7) The Cabinet Office releases the August Economy Watchers’ Survey conducted from Aug. 25 to Aug. 31.

The July report indicated that confidence continued to improve moderately as hot weather boosted demand for air conditioners and other seasonal goods. Some easing in price hikes and summer holidays supported tourism. But consumers remain cautious amid elevated costs and the life-threatening heat wave kept many people indoors during the daytime. The powerful 7.1-magnitude earthquake that shook Kumamoto Prefecture in southwestern Japan on July 28 also caused hotel booking cancellations in the wider Kyushu region.

The Watchers’ sentiment index showing the direction of Japan’s current economic climate rose to a five-month high of 45.7 in July on a seasonally adjusted basis, posting the third straight rise after rising to 44.0 in June from 43.6 in May. The last time the index was above the neutral line of 50 was in March 2024, when it stood at 50.1.

Looking ahead, the five-day long weekend in September and solid demand by visitors from overseas who are taking advantage of the weak yen propped up confidence among the tourism and leisure industries while the lingering U.S.-Iran dispute is making the outlook uncertain. Some respondents are concerned that the damage inflicted by the earthquake will reduce production and new orders from the affected areas.

The Watchers’ outlook index, which shows sentiment in two to three months, marked its fourth straight increase but edged up just 0.1 point to 45.8 in July after making a clear gain to 45.7 in June from 40.7 in May. The index started the year at 50.1 before slipping to 50.0 in February and plunging to 38.7 in March.

Thursday, Sept. 10
1030 JST (0130 GMT Thursday, Sept. 10/2130 EDT Wednesday, Sept. 9) Bank of Japan board member Kazuyuki Masu, a former executive at the Mitsubishi Corp. trading firm, speaks to business leaders in Fukui in central Japan.

Thursday, Sept. 10
1400 JST (0500 GMT/0100 Thursday, Sept. 10) BOJ board member Masu holds a news conference in Fukui.

Friday, Sept. 11
0830 JST (2350 GMT/1930 EDT Thursday, Sept. 10) The Bank of Japan releases the August corporate goods price index (CGPI).
Mace News median: domestic CGPI +7.4% y/y (range: +6.9% to +7.8%) vs. July +7.2%; +0.0% m/m (range: -0.5% to +0.4%) vs. July +0.1%

Producer inflation in Japan is expected to accelerate slightly to 7.4% in August after unexpectedly easing to 7.2% in July from 7.3% in June as the lingering Mideast conflict kept energy and shipping costs high and artificial intelligence projects boosted memory chip prices globally. The yen remains relatively weak despite a recent pickup amid market talk of imminent U.S.-Japan dollar-selling intervention, leaving imports expensive.

The 7.4% increase on the year in the corporate goods price index would remain the highest since 7.4% recorded in March 2023.

Inflationary pressures are forecast to have moderated further on the month to being flat in August from increases of 0.1% in July, 0.5% in June, 1.1% in May and 2.8% in April. Rice prices are now under year-earlier levels after domestic supply shortages were resolved last year while the shortage of naphtha, a key petroleum product to make plastics and resins, has also eased.