Economy in Brief

This week, our focus turns to Japan as the Bank of Japan (BoJ) prepares for its key policy decision on Wednesday. While the BoJ has made meaningful progress toward monetary policy normalization, it remains an outlier among major central banks, many of which have already begun easing after previous tightening cycles (chart 1). The rationale for Japan’s shift is clear—after decades of chronic price stagnation during the so-called Lost Decades, the country has finally experienced sustained inflation, warranting a gradual recalibration of monetary policy (chart 2). That said, Japan’s inflation story is not without challenges. A rice shortage has driven prices sharply higher, underscoring supply-side pressures in an economy that remains vulnerable to commodity price fluctuations (chart 3). Meanwhile, wage growth is also picking up, with annual wage negotiations delivering encouraging preliminary results—this spring, it’s not just cherry blossoms that are in full bloom (chart 4). These developments have been reflected in rising Japanese government bond yields and a notable recovery in the yen against the US dollar (chart 5). However, part of this yen strength may also be linked to Japan’s recent divestment of US Treasuries, as the country has significantly reduced its holdings over the past year (chart 6). As the BoJ navigates its policy shift, the coming months will be crucial in determining whether Japan can sustain its inflation momentum without sacrificing economic stability.

Japan monetary policy The Bank of Japan (BoJ) initiated a major shift last year, gradually moving away from its eight-year-long negative interest rate policy, signalling a transition from its ultra-loose monetary stance. Since then, the BoJ has raised interest rates three times, citing positive developments in inflation and wage growth—topics we will explore in more detail shortly. However, as shown in chart 1, the BoJ remains far behind its peers in the policy cycle. Major central banks like the US Federal Reserve, the Bank of England, and the European Central Bank have already completed their tightening cycles and are now easing, as inflation has become better-behaved. Moreover, Japan’s real policy rates remain deeply negative, with low policy rates persisting while inflation continues to rise. Despite this, investors do not anticipate another rate hike during this week’s BoJ monetary policy meeting, with the next tightening move expected sometime in Q3.

Industrial output European monetary union rose 0.8% in January; this is for the headline series that excludes construction. Manufacturing output rose by 1% in January as well.

Sequential calculations show that overall manufacturing fell by 0.1% over 12 months, rose at a 0.8% annual rate over six months, and is now rising at a 2.1% annual rate over three months and accelerating pattern. Similarly, manufacturing output rises by 0.1% over 12 months, gains 0.2% at an annual rate over six months, and expands at a 2.1% annual rate over three months Like the headline series, manufacturing also shows acceleration in output is underway. The effect is present but not powerful.

Sectors In January, the gain in overall output was mostly on the back of intermediate goods where output rose 1.6%, capital goods output also rose by 0.5%, consumer goods output fell by 2.8%. In the month, however, the strength of intermediate goods and capital goods was enough to carry the day to an overall output expansion. Sequentially, looking at growth rates over 12 months, six months, and three months, we see a steady acceleration for overall consumer goods output, for the output of consumer durable goods, and generally for the output of consumer nondurables (with a very small exception). Intermediate goods output also shows steady acceleration. The only real exception is for capital goods, where output falls by 2.1% over 12 months, improves to a decline of only 1% over six months but then lapses into a 4.7% annual rate decline over three months. Manufacturing, except for capital goods output, is showing acceleration that is broad-based.

Quarter-to-date In the quarter to date, overall output is growing at a 3.6% annual rate. Manufacturing output is growing at a 3.3% annual rate. Output growth is positive in all the manufacturing sectors and subsectors except for capital goods where output is falling quarter-to-date at a substantial 4.1% annual rate. All of these, of course, are nascent figures because we are only one-month into the quarter. These growth rates are calculated by taking the compounded annual rate for January over the centered fourth quarter average for all of output, sector-by-sector.

More broadly, the queue percentile standings show that year-over-year output growth is below its median. The queue percentile standing data show broad-based weakness in the industrial sector. Overall output has a 32.6 percentile standing; manufacturing has a 26.6 percentile standing. Across sectors, consumer goods output is still strong with an 88.5 percentile standing- that's the result of strength in consumer nondurables that have a 90.4 percentile standing. However, consumer goods output is still held back by a consumer durable goods output standing, at a 38.1 percentile. Intermediate goods have a 32.1 percentile standing, while capital goods, which is an important sector in the European Monetary Union, have only a 15.6 percentile standing, extremely weak.

Across countries Reviewing the data across countries, Among the 11 reporting EMU countries, five of them show IP growth above its historic median rate since 2006. Austria, Germany, and the Netherlands show output on an accelerating path, while France, Spain, Malta, and Ireland show decelerations in train. Viewed separately rather than as part of a sequence, output is nonetheless accelerating in 50% of the reporters over 12 months, in 41.7% over six months and among 54.5% over three months. There is progress but it is uneven and still slow. However, with the new tilt to more military spending – something that is already agreed to in Germany - we can expect output progress will step up more readily in the months ahead.