In recent months, Japan's core inflation data has witnessed a continuous rise, causing some concern among economists and policymakersThe persistent pressures of insufficient economic growth potential and increasing external uncertainties have clouded the landscape, complicating the decision-making process for the Bank of Japan (BoJ). This prevailing atmosphere of caution has resulted in the central bank sending signals that they are in no rush to raise interest rates, even in the face of rising inflation metrics.

On October 18, the Japanese Ministry of Internal Affairs and Communications released significant data revealing that Japan's core Consumer Price Index (CPI), which excludes fresh food items, had risen by 2.4% year-on-year to 108.2 in SeptemberThis marks the 37th consecutive month of year-on-year increases in this specific indicatorHowever, despite this consistent rise, the BoJ has not changed its stance on monetary policy significantly

Just two days before the data was released, Bank of Japan policy member Seiji Adachi indicated on October 16 that any increase in rates should be approached "very cautiously," arguing that there is currently no necessity for rapid rate hikes to combat inflation and emphasizing the need to avoid hasty increases.

Analysis suggests that while Japan’s economy saw a rebound from negative growth to positive in the second quarter, the recovery remains tenuous and lacks robust momentumChallenges associated with sustained inflation have made domestic demand remain subduedOver the past three years, Japan has strived to foster a "virtuous cycle of price and wage increases," yet wage growth has not kept pace with inflation, leading to a prolonged slump in personal consumptionData from early October revealed that Japan's real wage income had declined by 0.6% year-on-year in August, with total household spending also decreasing by 1.9% in the same month.

The situation has been further complicated by recent scandals involving major corporations like Toyota, alongside a decline in Japanese manufacturing competitiveness, which has weakened global demand for Japanese products

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From the perspective of industrial economics, manufacturing is a crucial pillar of Japan’s economy; a decline in its competitiveness can have profound implications for the broader economic frameworkOn October 17, the Ministry of Finance reported a trade deficit of 294.3 billion yen in September, marking the third consecutive month of trade imbalances due to reduced exports and increased importsA closer look at the data revealed that exports of vehicles, mineral fuels, and construction machinery fell by 9.2%, 49.8%, and 33.3% respectively compared to the previous year.

In this context, if interest rates were to rise consistently, it could trigger a cascade of adverse effectsHigher rates would elevate financing costs for businesses and borrowing costs for consumers, potentially dampening both corporate investment enthusiasm and consumer spending willingnessAlthough increasing interest rates might lend some support to the yen's exchange rate, an excessive appreciation of the yen could negatively impact export performance

According to international trade theory, a stronger yen makes Japanese exports more expensive in global markets, thus diminishing their price competitiveness and further undermining export activityConsequently, the Bank of Japan faces the formidable task of delicately balancing the need for exchange rate stability against the imperative of controlling inflation.

Moreover, the financial burden of government debt is significant and warrants attentionAs of June 30 of this year, Japan's total government debt—including national bonds, loans, and short-term securities—reached a staggering 1,311.421 trillion yen, marking the first time it has surpassed the 1,300 trillion yen thresholdThis colossal debt load places immense pressure on the government concerning adjustments to monetary policyAn increase in interest rates would further escalate the government's interest expenditures, inevitably siphoning resources away from critical areas such as education, healthcare, and infrastructure development

This trend could adversely affect the government's ability to provide essential public services and may have detrimental repercussions on long-term economic growth.

Japan's economic landscape is also fraught with deeper structural issuesThe prevalent practice of lifelong employment and seniority-based wage systems in Japanese firms has led to dwindling capacity for human capital innovation—a challenge particularly palpable within the manufacturing sectorAdditionally, while the government has introduced support measures for corporate financing to stave off bankruptcies, this has engendered a predicament where "zombie companies" linger in the market, inhibiting dynamismFurthermore, with Japan now firmly cemented in a super-aged society, the impact of an aging population on private sector demand continues to grow.

It is also crucial to acknowledge the external factors influencing decisions at the Bank of Japan