–Bank of Japan in No Hurry to Raise Interest Rates to Counter Any Reversal in Easing Inflation amid Mideast War
By Max Sato
(MaceNews) – Here are the key Japanese events for the coming week. Parliamentary debate on the fiscal 2026 budget continues at the key lower house budget committee.
Prime Minister Sanae Takaichi is urging lawmakers to expedite the election-delayed legislative procedures to enact the budget in time for the April 1 fiscal year start by clearing the first hurdle (approval by the committee) within days, instead of weeks, while some opposition parties have called it undemocratic.
Banking on the super majority that the conservative ruling Liberal Democratic Party scored in the Feb. 8 general elections, Takaichi appears confident that the budget can take effect without much delay because the House of Representatives can override the budgetary decision by the House of Councillors, where the ruling coalition lacks a majority.
On the trade front, the U.S. Supreme Court ruling that the existing stiff, unilateral Trump tariffs are unlawful does not immediately support Japanese exports of key products (and U.S. firms and households) as the sectoral import duties remain in place at 15% for automobiles and 50% for aluminum and steel.
They still hurt the auto industry as shipments of autos and auto parts to the important U.S. market accounts for a range of 36% to 38% of total Japanese exports while exports of those metals have a combined share of a much smaller 6% to 9%, according to the Cabinet Office based on Japanese and U.S. trade data.
Yet, Japanese exports to the world have shown some resilience, weathering the drag from U.S. trade rows and riding the wave of recovering demand from Europe and Asia. The fifth straight year-on-year increase in January was driven by demand for computer chips, non-ferrous metals and plastics, as largely seen in recent months.
What is concerning in economic data is that Japan’s national wealth is being eroded by low food and energy self-sufficiency and high import costs as the yen has remained stubbornly weak. The real gross national income slumped a seasonally adjusted 0.5% on quarter in the October-December period (-1.9% annualized), marking its first decline in seven quarters following a 0.3% rise (+1.1%) in the prior quarter. GNI measures the total income earned by the public and private sectors within Japan. It includes income from foreign investments but excludes income gained by foreigners in Japan.
This erosion could get worse if crude oil prices continue rising in response to heightened tensions in the Middle East, depending on whether Tehran will stop bombing its Gulf neighbors as it has promised and how U.S. and other forces can protect commercial vessels from Iranian attacks and any mines to be placed in the waters.
Bank of Japan Deputy Governor Ryozo Himino made it clear in a recent speech that the central bank would not be in a hurry to raise interest rates just because there is a supply-side shock to the economy, as in a spike in energy costs.
“In addressing inflation driven by demand shocks, monetary policy can directly counteract the causes of inflation by influencing GDP,” he said. “In contrast, responding to inflation driven by supply shocks could inadvertently disrupt GDP, even though it is not the source of the problem.”
“Moreover, as might be anticipated from the difference in the length of the channels, empirical studies show that GDP reacts relatively quickly to shifts in the policy interest rate, whereas it takes longer for prices to respond,” he continued. “Hence, when addressing temporary supply shocks, it is possible that the effects of the shocks may have already dissipated by the time the policy measures take effect. It is therefore often more prudent to confirm underlying inflation when responding to supply shocks (bold by Mace News).”
BOJ watchers expect the bank to hold its policy rate until mid-2026 after conducting its first rate hike in six meetings in December by raising it by 25 basis points (0.25 percentage point) to 0.75% a 30-year high as part of its policy normalization.
Looking at this week’s data, revised Q4 GDP is widely expected to show a sharp upward revision based on the latest MOF business survey on capital investment, inventories among other topics. Household spending for January is likely to paint a sluggish but resilient picture while upstream inflation seen in producer prices is set to ease further in February, thanks to fading effects of earlier domestic rice supply shortages and still weak fuels prices measured before the Iran war.
– Sunday, March 8
– North America switches to daylight saving time from standard time. The eastern daylight saving time is now 13 hours behind the Japan standard time, instead of 14 hours (Japan does not have a daylight saving time).
– Monday, March 9
0830 JST (2330 GMT/1930 EDT Sunday, March 8) The Ministry of Health, Labour and Welfare releases preliminary January average wages (to be included in January household spending due March 10).
– Monday, March 9
1400 JST (0500 GMT/0100 EDT Monday, March 9) The Cabinet Office releases the February Economy Watchers’ Survey conducted from Feb. 25 until Feb. 28. The February report is expected to point to sluggish but resilient consumption, with key index seen little changed from the previous month. The Israeli-U.S. military attacks on Iran began on Feb. 28, which means the results of the February poll of officials from a wide range of sectors do not reflect the latest spike in geopolitical risks.
Last month, the survey for January showed that the recent gradual pickup in consumer and business sentiment was dampened by bad weather and rising borrowing costs for housing construction. Department store sales have seen a plunge in spending by visitors from overseas as China has surged its citizens to boycott Japan over Prime Minister Takaichi’s remarks that a military threat to Taiwan would heighten Japan’s own security risks.
The Watchers’ sentiment index indicates the direction of Japan’s current economic climate fell for the third straight month in January. It edged down to a seasonally adjusted 47.6 after slipping to 47.7 in December from 48.0 in November and rising to a 10-month high of 48.2 in October from 47.0 in September. The index has stayed under the key 50 line for nearly two years. It was last above the neutral line in March 2024 (50.1).
The Watchers’ outlook index, which projects sentiment in two to three months, rose to 50.1 in January from 49.5 in December and 49.4 in November. The index surged to 52.2 in October from 48.4 in September, returning to positive territory for the first time since August 2024 (50.2).
– Tuesday, March 10
0830 JST (2350 GMT/1930 EST Monday, March 9) The Ministry of Internal Affairs and Communications releases January average household spending.
Mace News median forecasts: +1.8% y/y (range: +0.6% to +5.2%) vs. Dec -2.6%; +0.6% m/m (range: -0.4% to +2.9%) vs. Dec -2.9%
Japan’s real average household spending is expected to rise 1.8% on year in January, reversing the 2.6% drop in December on a rebound in auto purchases, but consumers remain cautious amid falling real wages. The latest consumer trend is to simplify ceremonies and spend less on wedding and funerals while focusing on food and other daily necessities. There is also a widespread move to switch more affordable mobile communications plans.
Retail sales, which do not have a close correlation to household spending, came in stronger than expected in January, up 1.8% on the year (vs. consensus +0.1%), led by strong demand for appliances (possibly heat pumps in snowy weather) and automobile, but the pace of increase was capped by falling fuel prices. The government scrapped a gasoline surcharge at the end of 2025 and department store sales have been hit by Beijing’s call on Chinese tourists to boycott Japan over bilateral diplomatic rows.
– Tuesday, March 10
0850 JST (2350 GMT/1950 EDT Monday, March 9) The Cabinet Office releases revised (second preliminary) GDP for October-December.
Mace News median: +0.3% q/q (range +0.2% to +0.4%) vs. Q4 prelim +0.1%; +1.3% annualized (range +0.8% to +1.5%) vs. Q4 prelim +0.2%; +0.3% y/y (range +0.2% to +0.4%) vs. Q4 prelim +0.1%
Revised GDP data is expected to show the rebound in Japan’s wobbly economy for the final quarter of 2025 turned out to be much stronger than previously estimated, thanks to robust business investment in equipment and software found in the quarterly survey by the Ministry of Finance released on Feb. 3. The expected sharp upward revision also comes from a smaller drop in public works spending.
The median projection by economists polled by Mace News now points to a 0.3% increase in the gross domestic product on quarter, or an annualized rate of 1.2%, up sharply from the initial reading of a 0.1% gain (0.053% to be more precise), or 0.2% (0.21%) annualized. It follows the economy’s first contraction in six quarters in the July-September quarter, down 0.7% q/q (2.6% annualized).
Looking ahead, economists expect the Q1 GDP to grow at around 1.5%, led by resilient consumer spending amid easing inflation and solid business investment plans to address labor shortages and despite sluggish exports.
The effects of firmer business and public investment likely raised the contribution of domestic demand to +0.3 percentage point in the revised data from the initial estimate of zero (+0.04 point). External demand, as measured by net exports (exports minus imports), is seen unrevised at zero contribution (+0.02 point in the preliminary data) as stiff U.S. tariffs choked exports of autos, metals and computer chips.
In addition to supply-side data on capital spending that was used in the preliminary GDP estimate, the Cabinet Office is using demand-side capex figures from MOF survey which also covers earnings and inventories among other topics.
Private consumption, which accounts for about 55% of the GDP, remains sluggish in the face of elevated costs for daily necessities and falling real wages, with its resilience fizzling out toward the end of the year when bad winter weather hampered economic activity. Its quarterly growth is forecast to be unrevised at +0.1%, which was its seventh consecutive growth in the initial reading.
Consensus forecasts for key components in percentage change on quarter except for domestic demand, private inventories and net exports, whose contributions are in percentage points. Figures in the preliminary data are in parentheses:
GDP q/q: +0.3% (+0.1%); 1st rise in 2 qtrs
GDP annualized: +1.2% (+0.2%); 1st rise in 2 qtrs
GDP y/y: +0.3% (+0.1%); 6th straight rise
Domestic demand: +0.3 point (+0.04 point); 1st rise in 2 qtrs
Private consumption: +0.1% (+0.1%); 7th straight rise
Business investment: +1.1% (+0.2%); 1st rise in 2 qtrs
Public investment: -0.2% (-1.3%); 3rd straight drop
Private inventories: -0.2 point (-0.2 point); 2nd straight drop
Net exports (external demand): +0.02 point (+0.02 point), 1st rise in 2 qtrs
– Wednesday, March 11
0850 JST (2350 GMT/1950 EST Tuesday, March 10) The Bank of Japan releases the February corporate goods price index.
Mace News median: CGPI +2.1% y/y (range: +2.0% to +2.3%) vs. Jan +2.3%; +0.1% m/m (range: -0.1% to +0.2%) vs. Jan +0.2%
Producer inflation in Japan is expected to ease further to 2.1% in February from 2.3% in January and 2.4% in December as domestic rice supply shortages have been resolved and fuel prices have been falling. Supply disruptions and strong demand have pushed up copper prices, leading non-ferrous metals higher.
The projected 2.1% increase in the corporate goods price index remains the slowest since 1.2% in April 2024. Producer prices have eased gradually in recent months after having hit a recent peak of 4.3% in each of February and March 2025 (the highest since 4.5% in June 2023).
On the month, the CGPI is forecast to post a sixth straight increase but up just 0.1% following a 0.2% gain the previous month.