The Zhitong Finance App learned that Japan's weak consumption may increase the political pressure faced by the Bank of Japan to raise interest rates to slow the depreciation of the yen, as the depreciation of the yen is thought to cause rising import costs and causing harm to Japanese households. Analysts said that this pressure may prompt Bank of Japan Governor Ueda Kazuo to continue to send hawkish signals in terms of policy prospects, but it will also issue many warnings to hedge against the risk that a rebound in consumption may take longer than expected.

Despite the Bank of Japan's decision in March to end its eight-year negative interest rate policy, the yen depreciated by about 10% against the US dollar because the market is concerned about the still huge interest rate gap between the US and Japan.

According to data released on Thursday, Japan's GDP fell 0.5% month-on-month in the first quarter, falling short of the market's expectations of a 0.4% month-on-month decline. This was partly due to the weakening yen, which raised the cost of living and harmed consumption. At the same time, Japan's exports have also declined sharply, indicating that the benefits brought to exporters by a weaker yen are weakening.

Analysts said that weak economic data alone may not force the Bank of Japan to re-examine the steady rate hike plan formulated in April, because policymakers are more concerned about whether consumption will rebound later this year as they expected. However, they said it would highlight the importance of upcoming consumption, wage and service inflation data in judging the timing of the next rate hike.

Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said: “The Bank of Japan is likely to stick to the view that rising wages will boost consumption. However, we may not be able to confirm whether this situation is true until the second-quarter GDP data to be released in August is released.”

The weak yen has curtailed domestic consumption, and the new price pressure brought about by import costs raises doubts. Japanese Prime Minister Fumio Kishida, who is already plagued by low approval ratings, can deliver on his promise and raise inflation-adjusted wage growth to a positive level in the next few months. Although the Bank of Japan has ruled out the possibility of using monetary policy to influence exchange rate trends, concerns about the negative factors of the weakening yen are growing, leading some government and business executives to call on the Bank of Japan to raise interest rates.

Masakazu Tokura, chairman of the Japan Federation of Economic Organizations (Keidanren), told the Japanese Government's Supreme Council on May 10 that inflation must remain moderate so that companies can earn enough money to continue raising wages. Masakazu Tokura said, “Considering the risk of excessive price increases due to a weak yen, I hope the government and the Bank of Japan aim to achieve an appropriate level of inflation of around 2%.” Furthermore, the minutes of the meeting showed that Mana Nakazora, a private sector member of the committee, also urged the Bank of Japan to help “ease downward pressure on the yen” through monetary policy.

Previously, continuous pressure from the Bank of Japan had forced the Bank of Japan to revise the April dovish policy communication. The latter was blamed by the outside world for triggering a further sharp decline in yen. After meeting with Fumio Kishida on May 7, Kazuo Ueda said that the Bank of Japan will be “wary” of yen trends when formulating monetary policy. A day later, Kazuo Ueda said that if the fall in yen has a significant impact on prices, the Bank of Japan may raise interest rates.

Meanwhile, on April 26, Kazuo Ueda also said that the recent fall in yen will not immediately affect inflation. This statement at the time lowered the exchange rate of the yen against the US dollar to more than 160 yen per dollar, and sparked speculation that the Japanese government interfered in the foreign exchange market.

Although the yen has since recovered some of its losses and is currently hovering around 155 yen per dollar, complaints from the Japanese government continue. Japan's Finance Minister Shun Suzuki said on Tuesday that the government and the Bank of Japan must “avoid friction caused by policy differences.” A government source said that this statement was a reminder of the concerns of the Bank of Japan about the weakening of the yen. A source close to the Japanese government also said, “In fact, the current level of yen has a huge negative impact on people's lives.”

In theory, there is little point in raising interest rates when the economy is weak. However, the situation is different in Japan. The inflation rate has surpassed the Bank of Japan's 2% target for two consecutive years, yet short-term interest rates are still hovering around zero. Even a modest increase in nominal interest rates would still cause inflation-adjusted real interest rates to be negative.

Eiji Maeda, a former senior official at the Bank of Japan, said that the Bank of Japan may not raise interest rates simply to slow the fall of the yen. He added that the yen trend may have a greater impact on prices than when Japan fell into deflation. “From this perspective, the impact of a weak yen on inflation is important in guiding monetary policy,” he said. He expects the Bank of Japan to raise interest rates as early as July.