Masazumi Wakatabe’s term as deputy governor of the Bank of Japan started in 2018, right before the Covid pandemic was on the verge of taking off, and ended in 2023 just when it was under control enough for governments around the world to start easing up and let people get back to work, school, and life. He has ridden the economic and inflation waves in one of the gobal economy’s most volatile and stress-driven episodes. So now, as Japanese policy makers wait to see how Trump tariffs hit their economy, what they do to inflation, growth, exchange rates and more, what does he see?
Stickinesss in prices for sure as supply side factors exceeed demand side pressures by a large margin. Who could have foreseen the rice shortage that helped create a big jump in key measures of Japan’s consumer price inflation gauge? Wakatabe notes that it has died down but stressed that it has helped create a certain “stickiness” and persistence that has contributed to the upward momentum of the 2025 inflation dynamics.
An interesting note on Japan’s recent rice shortage and what it means for inflation: Wakatabe says the fact that more Japanese housewives have become part of the workforce so that there is less time to cook hot rice to eat in the morning and is being replaced by bread, helping to bring down the price of rice. On the other side of the demand curve he notes that tourists coming to Japan still like to be traditional and eat some form of rice in their breakfasts.
Add in expectations that even as the BOJ raised its inflation forecast at its meeting this past week as demand induced, underlying inflation is expected to climb, and then after that is expected to head down to it’s 2% target level. “Governor Ueda is obviously trying to say that they are on track, they are within the range of their projections and predictions,” Wakatabe says.
While the door to a BOJ rate hike could be open in September, he says it is a step Ueda is more likely to make in October . Not only will Japan’s latest GDP report wbe released in mid-August, and is expected to show some “positive uptick,” Ueda says there will be more needed evidence of how Trump’s tariffs are affecting the economy.
So dive in and hear what Wakatable has to say. Wondering how the recent Japanese election which saw Prime Minister Ishiba fall even further from power is - or is not - affecting the BOJ’s policy path? You won’t be disappointed, he has plenty to say. And a quick read of these transcript key points below will set the stage for you.
Supply shocks reverberate in Japan? 00:01:15:07
I think that governor Ueda, is very cautious about the rate hikes. But first of all, I think that he had an understanding about the current inflation dynamics, as in the following terms. He thinks that the current inflation, is still due to, the so-called supply shocks. So that's the energy and the food prices are rising. But what the BOJ, the central bank, should be concerned about is, underlying inflation, meaning that inflation driven by demand factors. In that sense, the current assessment is quite, I think, right. And, in fact, the inflation rate in Japan is, a bit declining from the previous month.
BOJ and its inflation reduction options 00:02:08:03
So, it's about 2.9% for the headline, and I think that if you, exclude the fresh food, it's like 3.1%. What's happening is that the, the, the energy, price is, declining. Still, food prices are increasing, but these are more or less like the supply side shocks. That's what the governor said. If that is the case, the BOJ, should not move to, hike rates to counter the, supply-induced, inflation. The, the governor said that, the viewers should be patient to, wait until the, underlining inflation has really reached the comfort level, which is consistent with the 2% inflation target. By the way, I think that if you strip the food and energy inflation rate out, in Japan is right now the rate is 1.6% or so. So, you know, it's, a little bit lower than the 3%. So that's, why the governor doesn't want to, make a hasty decision.
Change in lifestyle and inflation 00:04:18:12
So, what happened was that the, the consumption and the production of rice, has steadily, declining, over the years and more than a decade or so. So, you know, Japanese lifestyle has changed. So, for breakfast, we used to eat, hot rice. But, it's no longer the case because, you know, we don't have, housewives. Both partners <are part of> the work <force>, so that the, they would like to have a quick breakfast. So, they prefer bread rather than, rice. So that's and also the combined with the, the, the government's policy to reduce the, the, rice production, in tune with the, decreased demand.
A ’rice’ theory of inflation 00:05:21:20
We had a steady, declining trend for rice consumption and production. Then what happened last year was that the production side had a very bad weather. So the production had been cut back. And for the demand side the general trend is declining, but there was an uptick, in the demand for rice, last year and this year.
Japan inflation and carbohydrate switching! Rice, bread, rice 00:05:47:24
So, I must say that that because the price of bread, has increased due to the, shortage or the, the high prices of wheat coming from other countries. So, the the people are switching back to rice a little bit. And some would say that's because there are more inbound tourists to Japan who, who would prefer to eat rice in Japan.
Rice reserves tapped to stabilize prices- 00:06:19:17
These factors contribute to the, the, rapid rise in rice <prices>. So but after, the government has decided to, release the reserve rice, so that the price, has been stabilized – and the rice price has been stabilized and it's, really been declining from, let's say, May, so, I think that will show up in the headline, CPI figures later.
Rate hike coming…but not yet 00:07:40:01
We're going to get to that rate hike, but not yet. I think that there are two parts. One is that there is a genuine kind of, the revision of the figures among the BOJ staff and, of course, the board members, about the persistence of the so-called, induced supply shock that induced the price, increases. I remember that when I was the deputy governor, we already had some impact of the supply side, supply shocks, already.
Parsing out ‘temporary’ can be tricky 00:08:15:23
<back then…> towards the, the last month or by my, tenure, the inflation rate had already, reached above 2% in terms of a headline. But you know what? We knew and we still, we, believed that those were temporary factors, but the temporary factors turned out to be, persistent, longer than, we and the BOJ staff expected.
Some inflation effects have persistence 00:08:45:00 - 00:09:33:09
So that's the reason, I think that we have some sort of stickiness, in terms of, persistence and also a rice shortage. It was something the BOJ didn't stop, did not, forecast. So that contributed to the upward revision to the 2025, inflation, dynamics. The second part is, of course, that there is the, underlining logic behind the BOJ decision, which is that although the temporary factors that would wane in due course, the demand induced, underlying inflation, also would climb.
Underlying inflation trend is still on track 00:09:33:15
So, I think that the year 2025, the supply side factor is still way over the demand side. But I think that there is understanding that the underlying inflation is just fine. And it's, according to the plan, the projections, predictions of the budget. That's what, I think the government is trying to sell. Good. Okay. So, so in a sense that, you know, that's, even though the inflation forecast is a bit, revised upward the, after that, the, you know, that the, the price, the inflation is going down to a 2% target level. So that's the broadly speaking, I think the governor Ueda is obviously trying to say that they are on track, they are within the range of their projections and predictions.
Dual exchange rate effects like a supply shock… 00:10:50:21
I think the yen has two, of course, two sides to the depreciation. One, the yen would, boost the Japanese economy, through the, the, external sector, exports. So that could contribute to the increase the profitability of firms. But also, second, that there is a path from the exchange rate to imported goods. That part is, more like a supply shock. So, currently, I think that the current level of exchange rate pass-through is waning.
The current yen is broadly on its policy path 00:11:36:00
So, as for the yen depreciating, I think that the exchange rate is, very important part of the story. But it's interesting that, when I watch the Governor’s press conference, he actually answers that question about exchange rates, saying that the current exchange rate is within their sort of their projections, predictions. So he thinks that, you know, that, right now he's comfortable, with the current level of exchange rate, that's, I think that's the, I would say count is remarkable because, you know, he indicated that the, the current exchange rate is okay.
Weak yen is not actionable by the BOJ 00:12:30:20
Actually the idea that he wanted to counter was the argument that because of the, the depreciating yen the BOJ should act sooner rather than later. I think that even though the exchange rate is depreciated, the, if it generates a kind of supply side inflation, then, we should not, move on that.
Exchange rates follow central bank messaging closely 00:13:01:08
I think that one reason why the Japanese yen is a little bit depreciating now. So, it's a combination of two factors. The one is, of course, that the Fed, decided to hold rates, and that Jay Powell, the Chairman, had a bit of a hawkish press conference. And Governor Ueda at his press conference was seen as a little bit dovish so, I think, that the central bank perceptions and the messaging, contributed to the, the movement in exchange rates.
A lot in the mix but the rate hike is most likely in October 00:15:01:11
We are going to have, the GDP report, I think, the August the 15th. So, and, as far as I see that, we are going to see some positive uptick, in the usual GDP estimate. So that means that, you know, that Ueda can move, on September, he does not have to wait until, October. But, October is the month, in which the budget would release the, it's, forecast after the report. So that, that means, you know, that October is kind of not your candidate if the budget would like to improve, And also, you know that the, the tariffs, the impact of tariffs, you do during the, the press conference. So by the way, there, keep saying that the, steel there should be, taking a closer look at the impact over the tariffs, on the Japanese economy. So that's the natural, I think, candidate for, to have a kind of a sense of the impact, the, the initial impact of this, the tariff would be in October. Yeah. But I can't really, you know, exclude a hike in, September. But I think that the October is the first candidate; September, it could be, I think. Well, I think that you can put it in other words, you're saying I don't want to forecast and well I’m hedging, okay. So, the October, I think that's the, the most plausible
Trade deal is ‘done’ but not resolved 00:17:40:08
Right. So how does it stack up for Japan? How does it, on the surface? We don't know. Not everything's really settled or agreed on. One stress, one thing more and Japan, my stress, another one. What do I think of the deal? I think that's the Japanese negotiators should have had the joint conference. We sent Mr. Trump, at least, to pin down what was agreed and what's not agreed. Okay. So, we had we have, the, the so-called the fact sheet, but we don't have a joint statement.
Uncertainty lingers 00:18:30:21
And so, and, if we don't have a joint conference, I think that a joint conference, it would be, good substitute for joint statement, but we didn't have that. There are some important details that we should really think about. So that in that sense, I think that the uncertainty remains. And, secondly, I think that it's true that the, the, we have settled on the 15% tariffs. But remember before that, the general, average tariff rate with Japan was, less than 5%, I think 2.5% or 3%. So, it's still, significant increase, for most of the Japanese, goods, to Japan, to the United States.
Impact of the tariff is ‘more certain’ but still elusive 00:19:22:09
So that's the issue, we still don't know that the, the full impact. I think that's 15%. It's not, it's, it will not decrease the Japanese GDP by one percentage point, but I think that it is more or less like, 0.3% or 4%. So, the other thing is going to be, the downward pressure, on Japan.
BOJ still unsure of the economic impact- 00:19:49:14
The BOJ just published the, the outlook report. So, the report said that the GDP growth rate, remained the same compared to the April prediction. In that sense, you know, that's the BOJ has not yet decided, the impact. We are going to invest, some money, right, to the United States? And so, the President Trump Club is a big number. So that's the headline number is very big.
Deal with America is not settled 00:23:01:11
The deal was not as bitter as we expected. What's happened is that, you know, that the initial tariff rate was about, 2.5, at least a 5% level. Trump said <initially> that they are going to increase their tariffs to, 40% or 35% or something and then settled down on the 15%. Okay. So, there's the shock, the initial shock and there's a relief. In that sense, I think that's the Japanese people feel the, relief as well. We expected Ishiba to say that he would resign soon. Yes. He said that he would. Do you know that <he now wants to> stay on; he mentioned several reasons. One reason is that the deal with the, the negotiations with the US, the Americans, not yet settled.
Time to stress expected inflation 00:29:12:01
If I were there, I would stress the so-called expected inflation, but that is kind of murky. I think that whatever we have, the expected inflation rate is increasing, for the household, it's way over 2%, but that's always the case. Households accurately expected inflation even during the deflation time. Market-based, expected rates, are about 1.5% or 1.6%. It's inconsistent with the, the CPI less, energy and food. If you think that the inflation expectations rise more, down the road, then I think that the BOJ, should feel comfortable adjusting its rate.
Japan’s economy is not performing well 00:30:44:04
The Japanese economy is not doing that well. The next GDP growth rate figure would be a positive one. But other business cycle indicators are kind of weakening so that right now I think that we are experiencing a downturn rather than an upturn of the business cycle.
Is Japan’s outlook about to worsen? 00:31:23:06
So, combined with the impacts of tariffs on the Japanese economy and uncertainties, I think that governor Ueda has more reason to be, cautious rather than being bullish. So, that's my general sense. So, you know, in that after October, the, business conditions may get worse.
Masazumi Wakatabe
Professor
Faculty of Political Science and Economics
Waseda University
Research Interests
History of Economic Thought, Central Banking in Theory and in Practice
Academic Degrees
MA in Economics, University of Toronto, 1994
Short Bio
My research interests are historical relationship between economic crises and economics and central banking in theory and in practice. Visiting fellows at Cambridge University, George Mason University, and Columbia University. Vice President of the History of Economics Society (2016 to 2017), Deputy Governor of the Bank of Japan (March 2018 to March 2023). Books include The Showa Depression (2004: Nikkei Prize for Excellent Book in Economics), Economic Crises and policy Responses (2009: Ishibashi Tanzan Prize), and Japan’s Great Stagnation and Abenomics (2015).
