The decision on interest rates in Japan faces challenges amid weak domestic demand

According to Odaily, Sayuri Shirai, former member of the Bank of Japan committee, has indicated that if the bank intends to raise interest rates further, it may have to act this year or miss the opportunity. Weak domestic demand in Japan does not sufficiently justify a rate hike, and if inflation falls below the bank's 2% target, advancing rate increases will become more difficult. Shirai stated: "The Bank of Japan may want to normalize policy while it can, even if just to slightly correct the excessive depreciation of the yen. However, the Japanese economy is too weak and the fragile domestic demand is incompatible with a path of rate increases." Despite positive signals in wage growth in Japan, persistent inflation is restraining household spending. Recent government data shows that private consumption remained stable from January to March. The central bank expects consumer inflation to slow below 2% starting in the next fiscal year, which begins in April 2026, and in subsequent years, which, according to Shirai, will complicate decisions on new rate hikes. Headwinds to growth are also intensifying: Japan faces the risk of a technical recession following economic contraction in the first quarter and a decline in exports to the U.S. in April for the first time in four months, highlighting the impact of high tariffs.