The Bank of Japan Deputy Governor Shinichi Uchida sees the US economy making a soft landing, as the country's 3% inflation figure for the 12 months ended June 2024 is just a percent above the Fed's target of 2%.
The release of weaker job data and the unwinding of Yen carry trades earlier this week caused the markets to nosedive on Monday. But even as they recover, Uchida sees the US taking on a soft landing approach.
Here is a look at what that means.
What Is Soft Landing?
In simple terms, a soft landing is when the government of a country makes efforts to gradually slow down the economy after a heat-up with the purpose of avoiding recession.
When the inflation of a country is above targeted levels, the government adopts fiscal and monetary actions to reduce economic activity and control inflation. However, excessive measures to control the economy could lead to a sharp decline in economic activity and a recession. In order to avoid this, a gradual control over the heightened economic activity, rather than a hard stop, is called a soft landing. It is essentially about maintaining a balance between economic growth and economic overheating.
What Happened In The US?
The US economy faced a gradual increase in inflation in 2022, hitting 9% levels in June. High inflation translates to rising prices. In order to control this, the US government hiked interest rates, meaning that borrowing became expensive and consumers tried to reduce spending.
However, the other side of this is that excessive hikes and reduced spending can lead to recession.
As of June 2024, US inflation stood at 2.97% and the US Federal Reserve aims to bring this down to 2%.
What Bank Of Japan Deputy Governor Projects
In order to bring inflation down to the expected levels of 2% without triggering a recession, the US will likely adopt a soft landing, according to Bank of Japan Deputy Governor Shinichi Uchida.
If the US' real economy heads towards a soft landing, this will likely be reflected in the financial and capital markets, including stock prices, he said. However, market developments are naturally more rapid than real economic developments and hence attention is warranted on the risk of current developments in financial and capital markets feeding into the real economy, Uchida said.
Also Read: An Emergency Fed Rate Cut Would Be A Mistake
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