Central Bank of Japan maintains interest rates amidst decelerating inflation, now at 2.7%
The Bank of Japan (BoJ), led by the incumbent governor Kazuo Ueda, has kept interest rates at 0.5% today, maintaining its current monetary policy despite analysts' predictions for an interest rate hike this year or in early 2026. The BoJ's decision was carried by seven votes to two, indicating a divided opinion within the bank.
Inflation in Japan, as calculated by the inflation calculator, slowed to 2.7% in August, down from 3.1% in July, according to the latest data. This decrease is attributed to a deepening of energy price deflation due to the resumption of electricity and gas subsidies. However, core inflation, excluding food costs, remained steady at 2.7%.
Japan's economy grew at an annualized pace of 1% in the second quarter, suggesting it is suffering less than expected from US tariffs. Despite this growth, key drivers of Japan's growth, such as auto shipments, decreased by 28.4% in August. Exports to the US plunged nearly 14% in the same month.
The fall in inflation and the slowdown in economic growth come as the ruling Liberal Democratic Party in Japan prepares for an election for a new leader. The incumbent, Yoshihide Suga, is stepping down, and a race for his successor will be decided on October 4.
The BoJ's statement suggests Japan's economic growth is likely to moderate. Tsuyoshi Ueno of NLI Research Institute described the dissent in the BoJ's decision as a 'bit of surprise'.
In other news, the BoJ announced it will start offloading funds bought as part of its monetary easing campaign. The BoJ began buying funds more than a decade ago to boost liquidity and reduce the cost of capital for firms. The move towards offloading funds is a shift in the BoJ's monetary policy.
The government in Japan is under pressure from voters due to rising rice costs. The government has not yet announced any measures to address this issue.
Meanwhile, the BoJ is still without a publicly indicated new governor. Since the resignation of Governor Kazuo Ueda, he remains the governor according to the latest available information.
In a political development, Ishiba's coalition has lost its majority in both chambers, potentially leading to a period of political instability in Japan.
Despite these challenges, Japan's economy continues to show signs of resilience, with rice price rises slowing following a sharp spike in the country. The BoJ will continue to monitor the situation closely and make decisions based on the best interests of the Japanese economy.
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