🤯 Have you seen our AI stock pickers’ 2024 results? 84.62%! Grab November’s list now.Pick Stocks with AI

Higher rates could knock Japan into recession, says former IMF economist Blanchard

Published 04/29/2024, 11:41 AM
Updated 04/29/2024, 11:46 AM
© Reuters. Passersby walk in front of a construction site in Tokyo, Japan February 15, 2024.  REUTERS/Issei Kato/ File photo

By Nell Mackenzie

LONDON (Reuters) - Japan would face "a fairly strong" recession if it were to raise interest rates, Olivier Blanchard, former chief economist at the International Monetary Fund, said on Monday.

Blanchard delivered his remarks on the same day the Bank of Japan was widely suspected of having intervened in the currency markets to boost the yen, which has fallen sharply this year to 34-year lows against the dollar.

Part of the decline in the currency has been blamed on Japan's ultra-loose monetary policy, as interest rates are far lower than in other major economies, even though the central bank ended negative rates in March.

"They're economically stuck," said Blanchard who cited the drop in workers' real wages and the country's growing deficit.

Blanchard, who is now a professor emeritus at Massachusetts Institute of Technology (MIT), was addressing attendees at the AIM Summit in London.

Japanese workers wages adjusted for inflation fell in February for a 23rd consecutive month, data showed earlier this month, suggesting higher prices kept up pressure on consumers' spending appetite.

The wage trend is among the key data the Bank of Japan examines for pay and inflation outlooks, crucial factors for the central bank to consider in deciding whether to unwind its stimulus policy further.

Furthermore, Japan's government debt-to-GDP ratio is also one of the highest in the world, having more than trebled to close to 260% from 85% back in 1994.

Looking at the bigger macro picture, Blanchard said a second term for former President Donald Trump was his biggest fear for the global economy.

A second term posed more risk than his first because during the first term he was prevented from making policy decisions that would have adversely affected the U.S. economy, Blanchard said.

This time, Blanchard said he believes Trump would staff his cabinet, and make key political appointments, with people he was more "comfortable with".

© Reuters. Passersby walk in front of a construction site in Tokyo, Japan February 15, 2024.  REUTERS/Issei Kato/ File photo

"When he replaces the Chairman of the Fed with someone who allows him to lower rates because then he can spend more, it'll be catastrophic for the whole world," Blanchard said.

The current chair, Jerome Powell, is serving a second four-year term as head of the U.S. Federal Reserve that is due to end in 2026.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.