Azernews.Az

by Alimat Aliyeva

Japan risks repeating the economic mistake that previously led to decades of stagnation, according to Makoto Sakurai, former member of the Board of Directors of the Bank of Japan, AzerNEWS reports.

Sakurai warned that if the central bank keeps interest rates too low for too long, it may eventually be forced to raise them sharply in response to accelerating inflation. He stressed that, given growing price pressures driven by global geopolitical tensions and energy market instability, the risk of stagflation is becoming increasingly real. “There is a serious risk that the Bank of Japan will fall behind the curve. It would be unthinkable to avoid raising interest rates in June,” Sakurai stated.

According to market estimates, the probability of an interest rate hike to around 1% in June is approximately 80%. Rising energy costs are fueling inflation while simultaneously putting pressure on an economy that remains heavily dependent on imported oil and gas.

At the same time, Japan’s GDP shows only limited signs of sustained growth. Although the economy expanded by 2.1% year-on-year in the first quarter, analysts expect momentum to weaken as higher fuel prices and supply chain disruptions continue to weigh on corporate profits. Inflationary pressures are also increasing, with a weaker yen and persistent labor shortages encouraging companies to pass higher costs on to consumers. Some forecasts suggest inflation could reach around 3.5% by autumn.

“If the Bank of Japan hesitates now, it will be forced to act more aggressively later, and that would do more damage to the economy,” Sakurai warned. “We are very close to repeating the policy mistakes that led to Japan’s ‘lost decades’.”

Stagflation refers to a rare economic situation in which stagnant growth and rising unemployment occur simultaneously with high inflation.

Interestingly, Japan is currently navigating one of the most delicate monetary policy transitions among major economies. While most central banks aggressively raised interest rates to combat post-pandemic inflation, Japan only recently began shifting away from its long-standing ultra-loose monetary policy. This makes its policy decisions especially sensitive, as even small rate changes can significantly affect the yen, global capital flows, and Japanese stock market stability.