Japan’s exports surged in January and business confidence improved in February, offering cautious relief for policymakers seeking to stabilise a fragile recovery. The data suggests strong regional demand, particularly from Asia, may help support growth. However, the International Monetary fund warned that risks remain skewed to the downside due to trade tensions, weak domestic demand, and financial vulnerabilities.
Export rebound and sentiment improvement:
Japan’s exports rose 16.8% year-on-year in January, the largest increase in more than three years, driven by robust shipments to China ahead of the Lunar New Year. Manufacturers’ confidence improved for the first time in three months, supported by stronger machinery orders and a weaker yen. Analysts caution that seasonal distortions linked to the timing of the holiday may have amplified the rise, meaning underlying trade momentum remains fragile.
Fiscal stimulus and policy tensions:
Prime Minister Sanae Takaichi has proposed tax cuts and increased spending to inject momentum into the economy following her recent electoral victory. Her plan includes suspending the 8% consumption tax on food for two years to ease pressure on households facing rising living costs. While the measure may boost consumption, it risks unsettling bond markets and weakening the yen, particularly given Japan’s already heavy debt burden.
Monetary tightening and debt pressures: The fiscal push has heightened tensions with the Bank of Japan, which is committed to normalising monetary policy after years of ultra-low interest rates. Continued rate hikes aimed at controlling inflation and stabilising the currency will increase borrowing costs and complicate management of Japan’s vast public debt. Finance ministry estimates indicate annual bond issuance could rise sharply in coming years as debt-servicing costs climb.
External risks and trade headwinds:
Japan remains exposed to global shocks, including higher U.S. import tariffs and intensifying foreign competition. Strained relations with China and shifting trade dynamics pose additional risks. Although exports have been recovering since a September trade deal with Washington established a 15% baseline tariff on most goods, momentum remains vulnerable to geopolitical and protectionist pressures.
Domestic demand and structural concerns:
Economists expect private consumption and wage growth to support recovery if real wages turn positive. However, inflation and higher import costs continue to erode purchasing power. The IMF warned that high public debt and a deteriorating fiscal balance leave Japan exposed to future shocks and urged continued monetary tightening while cautioning against further fiscal loosening, arguing that consumption tax cuts could weaken fiscal resilience.
Analysis:
Japan’s export surge provides short-term relief but does not resolve deeper structural vulnerabilities. Growth remains heavily dependent on external demand, leaving the economy sensitive to geopolitical tensions and trade disruptions. Takaichi’s fiscal stimulus may support near-term growth and political stability, yet it risks undermining fiscal sustainability and complicating monetary normalisation. The IMF’s warning highlights the delicate balancing act facing Tokyo: sustaining domestic demand while preserving financial stability. Japan’s medium-term outlook will depend on whether wage growth strengthens consumption and whether fiscal and monetary authorities can coordinate policy without triggering renewed volatility in bonds and the yen.
With information from Reuters.