MNI INTERVIEW2: Ex-BOJ Hayakawa Warns Of Japan Recession Risk

Japan risks falling into recession in the not-too-distant future as the slowing global economy and weak domestic income conditions weigh, a former Bank of Japan chief economist warned in an interview with MNI.

“It is difficult to pinpoint its timing but the possibility is high that Japan’s economy will fall into recession before too long,” Hideo Hayakawa, who also served as a BOJ executive director and is now a senior fellow at the Tokyo Foundation for Policy Research, told MNI.

Japan’s economy expanded in the second quarter as private consumption recovered, “supported by excessive saving and revival of economic activity (after the government lifted the quasi-measures to restrict economic activity),” Hayakawa said. But maintaining current levels of consumer spending was difficult to foresee as income conditions weaken and prices rise further in the coming months, including those for food and general living costs.

BOJ SHOULD HOLD NERVE

There is certainly a chance Japan’s core consumer price index rises to 3% around the autumn, Hayakawa said, but he advised the BOJ to keep its nerve on policy, although he accepted the government could look for some sort of reaction against higher prices.

“The BOJ must maintain the current easy policy. The vital issue is how public discontent with high prices and the yen’s fall escalates and how the government reacts to them. The BOJ itself will unlikely change its view on prices and policy. Rather, it depends on the government’s decision,” Hayakawa said.

“The rise in consumer prices was caused mainly by high energy prices. The rise in energy prices seemed to have peaked but the impact of the yen’s past fall will now start to emerge, keeping upward pressure on CPI,” he said.

TERMS OF TRADE

Hayakawa also pointed to the negative impact on the trade balance from elevated resource prices, which could weigh both on GDP growth and gross domestic income (GDI), which, along with a sluggish global economy, will increase downward pressure on Japan’s exports and industrial production.

“GDI fluctuates quarter-by-quarter but has largely been falling since the fourth quarter of 2020, meaning that income conditions have been worsening,” he said.

Japan’s GDI fell 0.3% q/q in the April-to-June period, an annualized growth rate of -1.2% (equivalent to JPY4.566 trillion), according to the latest GDP data.