Japan's Interest Rate Decision Faces Challenges Amid Weak Domestic Demand

According to Odaily, former Bank of Japan committee member Sayuri Shirai has indicated that if the bank intends to raise interest rates further, it may need to act within this year, or the opportunity will be lost. The weak domestic demand in Japan provides insufficient justification for a rate hike, and if inflation falls below the bank's 2% target, advancing rate increases will become more challenging. Shirai stated, "The Bank of Japan might wish to normalize policy while it can, even if only to slightly correct the excessive depreciation of the yen. However, Japan's economy is too weak, and fragile domestic demand is incompatible with a rate hike path." Despite positive signals in Japan's wage growth, persistent inflation is suppressing household spending. Recent government data shows that private consumption remained flat from January to March. The central bank forecasts that consumer inflation will slow to below 2% from the next fiscal year starting April 2026 and in subsequent years, which Shirai believes will complicate further rate hike decisions. Growth headwinds are also intensifying, with Japan facing the risk of a technical recession following economic contraction in the first quarter and a decline in exports to the U.S. in April for the first time in four months, highlighting the impact of high tariffs.