Core Viewpoint - The discussion on whether to continue interest rate cuts after the central bank's reduction on May 8 remains ongoing, with optimists believing the economy has stabilized and pessimists arguing that economic pressures persist, indicating that the rate-cutting cycle is not over [1][3] Long-term Importance of Rate Cuts - Since 2018, China has entered a long-term interest rate cut cycle, which is expected to continue due to ongoing adjustments in population, debt, and real estate cycles [4] - The population is projected to decline, with a decrease of 1.39 million in 2024 compared to 2023, and a forecasted reduction of 20.4 million by 2054, impacting long-term economic growth [4] - The macro leverage ratio is approaching critical levels, with a projected 298.4% by Q1 2025, necessitating debt management strategies supported by interest rate cuts [4][5] - The real estate market is still adjusting, with the price-to-rent ratio remaining high, indicating potential downward pressure on housing prices until a more stable equilibrium is reached [5] Short-term Importance of Rate Cuts - The need for stable growth remains crucial, especially in the context of global economic uncertainties and rising protectionism, which necessitates internal stability [7] - The real estate market's recovery is contingent on continued interest rate support, as housing assets constitute 66.8% of urban residents' total assets, significantly influencing consumption and investment [8] - A strong savings tendency among residents has led to a disparity between loan and deposit growth rates, indicating a need for lower interest rates to stimulate demand [8] Issues Not Resolved by Rate Cuts - Rate cuts do not address the issues of ineffective interest rate transmission, as the market remains segmented and the sensitivity of loan rates to market rates is low [10][12] - The persistent rise in leverage ratios is not solely a result of low interest rates; rather, it is influenced by investment efficiency and institutional frameworks [10] - The narrowing of banks' net interest margins is attributed to supply-demand dynamics in the banking sector rather than solely to interest rate reductions [11] - The widening of domestic and international interest rate differentials is influenced by differing economic conditions, necessitating a focus on domestic monetary policy rather than maintaining international rate parity [12] Remaining Space for Rate Cuts - There is still room for further interest rate reductions, with projections indicating that to maintain the government leverage ratio by 2025, the real interest rate should decrease to 0.32%, significantly lower than the current rate of 4.52% [13]

Long-term Importance of Rate Cuts - Since 2018, China has entered a long-term rate cut cycle, which is expected to continue due to ongoing adjustments in population, debt, and real estate cycles[8] - In 2024, China's total population is projected to be 1.408 billion, a decrease of 1.39 million from 2023, indicating a long-term trend of population decline[8] - By the first quarter of 2025, China's macro leverage ratio reached 298.4%, nearing the critical level of 300% identified as a potential financial crisis threshold[9] Short-term Importance of Rate Cuts - The contribution of net exports to GDP reached 38.9% in the first quarter, the highest since 2009, highlighting the need for internal stability amid external uncertainties[13] - Real estate assets account for 66.8% of urban residents' total assets, making housing market stability crucial for consumer spending and investment[14] - The current real estate interest rates remain high, suppressing demand, necessitating further rate cuts to stimulate the market[14] Limitations of Rate Cuts - Rate cuts cannot resolve issues such as poor interest rate transmission and rising leverage ratios, which require broader macroeconomic reforms[15] - The banking sector's net interest margin is under pressure not solely due to low rates but also due to a significant oversupply of capital in the market[16] - Domestic and international interest rate differentials are widening, with external factors influencing domestic monetary policy decisions[17] - To maintain a stable government leverage ratio by 2025, actual interest rates need to decrease to 0.32%, significantly lower than the current rate of 4.52%[17]

Core Viewpoint - The Bank of Japan maintains interest rates while lowering economic growth forecasts due to uncertainties surrounding U.S. tariffs, but inflation is expected to remain on track to meet the 2% target, indicating that tariff risks may only delay rather than disrupt the rate hike plans [1] Economic Outlook - The uncertainty surrounding U.S. tariffs has heightened trade policy unpredictability, with expectations that trade negotiations will progress and global supply chains will not face major disruptions [2] - Japan's economy is expected to face downward pressure from tariffs through three channels: slowing global growth, damaging corporate profits, and increased uncertainty leading to delayed spending by households and businesses [2] - Despite these pressures, a gradual recovery in overseas economies is anticipated to alleviate some of the downward pressure over time [2] Inflation and Wage Growth - The Bank of Japan has revised down its growth forecasts for fiscal years 2025 and 2026, indicating a phase of synchronized slowdown in inflation and wage growth, although labor shortages will maintain a positive wage-inflation cycle [2] - The timeline for achieving the inflation target has been pushed back, and the current environment suggests a period of inflation stagnation, making it difficult to assess the likelihood of achieving baseline scenarios [2] - The probability of achieving baseline scenarios has significantly decreased, and developments in tariff situations may alter these scenarios, directly impacting monetary policy decisions [2] Interest Rate Considerations - The timing for the next interest rate hike may not automatically align with the delayed timeline for inflation approaching 2% [3] - The Bank of Japan continues to provide monetary support, albeit with adjustments, as inflation is expected to gradually approach the target within the three-year forecast period [3] - The potential impact of U.S. tariffs on terminal rates is uncertain and may depend on changes in Japan's natural interest rate [3][4] Consumer Resilience - Rising food prices are affecting processed food sectors and suppressing some consumer spending, yet overall consumption trends remain upward [3] - The impact of wage increases on nominal income has not significantly boosted real income due to unexpected food price hikes [4]