In Japan, inflation continues to rise, leaving the central bank in a difficult position.
In March, inflation for the Tokyo metropolitan area – a leading indicator of price growth across Japan – reached 2.9% year-on-year. This figure is not insignificant in a country where households have long been accustomed to reduced inflation or deflation and weigh on consumer confidence.
In an ideal world, the Bank of Japan would act to contain inflation by continuing to tighten its monetary policy and raising policy rates further to levels above the current 0.5%. But the situation is far from ideal.
Expensive credit may be a trap
On the one hand, the archipelago's very high debt level means that any increase in the cost of credit translates into a greatly increased debt burden, which reduces the Tokyo authorities' budgetary and fiscal margin.
In addition, domestic demand is already weak and could still suffer from more expensive credit.
At the same time, higher rates will make the yen more expensive, which will affect the competitiveness of Made in Japan. Foreign trade is, therefore, facing enormous uncertainty, further reinforced by doubts about access to the American market for Japanese products.
For a while, Japan was not concerned by the announcements of customs duties made by the American President. The promise of massive investment in the United States by giants such as Softbank has undoubtedly contributed to this. However, the latest customs duties announced for the automotive sector will indeed concern vehicles and spare parts of Japanese origin.
Like many others, the Bank of Japan would probably have liked to leave its rates unchanged or even lower to prepare for the impact that the US tariffs could have on its export sector.
No more investing in Japan for now
However, in the face of rising inflation, the possibility of an upcoming increase in key rates persists. Japan is, therefore, in a particularly difficult position. We are no longer investing in it at this stage.
The Key Interest Rate In Japan (%)
Japan's rising inflation could force the Bank of Japan to revise its key rate upwards again. However, in the face of weak demand and uncertainties about foreign trade, such a choice will not be easy.