BoJ’s Nakamura: Economic uncertainty heightening, so cautious policy approach necessary

Bank of Japan (BoJ) board member Toyoaki Nakamura stated on Friday that, given the prevailing economic climate, “uncertainty over the economic outlook is heightening, so a cautious monetary policy approach is necessary.” Nakamura’s remarks come as the global economy faces a complex interplay of factors, including trade tensions and fluctuating commodity prices, impacting Japan’s economic prospects.

• Additional quotes from Nakamura’s address provide further insight into the BoJ’s considerations.
• US trade policy, the performance of overseas economies, and foreign exchange rates all exert influence on Japan’s economy and price levels, necessitating their careful consideration when formulating monetary policy.
• However, a medium- to long-term perspective on Japan’s fundamental economic strengths must also be factored into the policy-setting process.
• The risk of Japan entering a negative wage-inflation spiral is currently assessed as not substantial.
• Nevertheless, rising food prices could potentially affect underlying inflation trends, requiring vigilant monitoring.
• The hurdle for narrowing the wage divergence between large and small firms remains significant.
• Downward pressure on Japan’s economy is intensifying due to slowing global growth and declining earnings within the crucial automobile sector.
• Companies are increasingly postponing or adopting a wait-and-see approach regarding capital expenditure (capex) plans, largely due to uncertainties surrounding US tariff policies.
• If delays in capex become widespread, this could incentivize firms to relocate supply chains overseas to mitigate supply constraints.
• Japan is currently at a critical juncture in its efforts to fully escape deflation.
• Maintaining a steady monetary policy stance is deemed appropriate for the time being.
• Prematurely raising interest rates while growth is decelerating could dampen consumption and capex.
• Japan’s economy has exhibited moderate recovery, but some signs of weakness have emerged.
• The economy is facing increasing downward pressure as a result of the implementation of US tariff policies.
• Greater uncertainties stemming from US tariff policies could pose significant challenges for Japan’s economic outlook.
• The BoJ is closely monitoring future developments to assess whether firms will revert to a strategy of contracting their businesses through cost-cutting measures.
• There is observed polarisation in wage policies between large and smaller firms.
• Momentum for wage hikes has gained traction but could weaken depending on the ultimate impact of US tariff policies.
• Private consumption has lacked robust momentum, attributed to rising prices and households’ inclination towards thriftiness.
• Economic growth is projected to be moderate in the near term.
• Accommodative financial conditions are expected to provide ongoing support to the economy.
• The future trajectory of trade and other policies across various jurisdictions, and the subsequent reactions of overseas economic activity and prices to these policies, remains highly uncertain.
• It is crucial to pay close attention to the elevated uncertainty surrounding the outlook for the overseas economy and prices, which are significantly influenced by various trade policies.

Market reaction

As of the time of this report, USD/JPY is trading down -0.21% on the day, hovering near the 145.40 level. This movement reflects the market’s immediate response to Nakamura’s cautious remarks and the broader concerns about the Japanese economy’s vulnerability to external factors. Investors are closely watching incoming economic data and further policy signals from the Bank of Japan to gauge the future direction of the Yen.