Japan slipped into a technical recession. The Bank of Japan has to juggle supporting the yen and fragile growth

Japan’s
central
bank
is
expected
to
exit
its
negative
interest
rate
regime
this
spring,
though
sluggish
growth
will
limit
its
ability
to
alleviate
depreciation
pressure
on
the
yen,
according
to
a
former
Bank
of
Japan
board
member.

BOJ
Governor
Kazuo
Ueda
is
under
pressure
to
stem


yen
depreciation
driven
by
the
divergence
between
high
U.S.
interest
rates
and
Japan’s
ultra
easy
policy.
Yet,
he
is
also
constricted
by
high
inflation
that
BOJ
policymakers
still
deem
unsustainable,
even
as
it
crimped
domestic
demand
and
tipped
the
economy
into

a
technical
recession.
That
surprise
contraction
meant
Japan’s
economy
is
now
the
world’s
fourth
largest,

falling
behind
Germany.

“It’s
a
serious
challenge
and
dilemma,”
Sayuri
Shirai,
an
economics
professor
at
Keio
University
in
Tokyo,
told
CNBC’s
“Squawk
Box
Asia”
on
Thursday.
She
previously
served
as
a
member
of
BOJ
policy
board
from
2011
to
2016,
helping
to
make
monetary
policy
decisions.

“However,
I
think
BOJ
is
likely
to
take
some
policy
change,
including
[the]
removal
of
negative
interest
rates
this
spring,
because
I
think
they
worry
about
side
effects,”
she
said.

The
yen
retreated
to
around
150
to
the
dollar
this
week
after

U.S.
inflation
data
came
in
higher
than
expected,
dousing
hopes
of
a
quicker
Federal
Reserve
rate
cut.
The
yen’s
chronic
weakness
has
diminished
not
only
the
purchasing
power
of
consumers
in
Japan,
but
also
the
value
of
the
country’s
exports.

“I
think
they
want
to
take
this
opportunity
to
do
some
adjustments,
and
also
more
market
participants
anticipate
that
BOJ
will
do
some
normalization
this
spring.
So
regardless
of
whether
BOJ
is
able
to
achieve
2%
in
stable
manner,
I
think
BOJ
will
take
some
policy
change
this
spring,”
Shirai
added.

Even
if
BOJ
policymakers
deem
inflation
is
still
not
sustainably
driven
by
domestic
demand,
the
prolonged
high
inflation
rates
have
hit
domestic
consumption
—
a
key
reason
driving
the
second
consecutive
contraction
in
Japan’s
GDP
in
the
fourth
quarter.

While
inflation
has
been
gradually
slowing,
“core
core
inflation”
—
which
excludes
food
and
energy
prices
—
has
exceeded
the
BOJ’s
2%
target
for
more
than
a
year.

At
its

January
meeting,
the
BOJ
decided
unanimously
to
keep
short-term
interest
rates
at
-0.1%.
It
also
stuck
to
its
yield
curve
control
policy,
which
keeps
the
upper
limit
for


10-year
Japanese
government
bond
yield
at
1%
as
a
reference.

BOJ
policymakers
have
been
cautious
and
fastidious
with
their
primary
task:
reflating
an
economy
that’s
been
mired
in
decades
of
deflationary
pressures.

Many
in
the
market
expect
the
BOJ
to
move
away
from
its
negative
rates
regime
at
its
April
policy
meeting,
once
the
annual
spring
wage
negotiations
confirm
a
trend
of
meaningful
wage
increases.
The
central
bank
believes
wage
increments
would
translate
into
a
more
meaningful spiral,
encouraging
consumers
to
spend.

But
former
BOJ
policy
board
member
Shirai
said
currently
Japanese
yen-denominated
wages
and
household
consumption
are
both
dropping.

“And
so,
there
is
no
sign
to
see
this
about
your
cycle
between
price
and
wages
and
[consumer]
demand.
So
in
this
sense,
It’s
quite
difficult
for
BOJ
to
take
[the
path
of]
normalization,
even
though
inflation
can
be
above
2%
for
some
time,”
she
added.

“But
at
the
same
time,
this
interest
[rate]
differential
creating
huge
depreciation
[pressure
for
the
Japanese
yen]
…
so
you
see
it’s
very
difficult
to
raise
interest
rates.”
Shirai
said.

“So
even
if
Bank
of
Japan
raises
interest
rates
a
little
bit,
BOJ
has
to
say
they
cannot
do
…
continuous
interest
rate
hikes
because
the
economy
is
weak.
If
they
do
some
normalization,
[it
would
be]
just
[the]
removal
of
negative
interest
rates
—
then
it
doesn’t
really
have
much
impact
on
the
depreciation
of
the
yen.”

—
CNBC’s
Lee
Ying
Shan
contributed
to
this
story.