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Japan: Solid growth and low inflation - Scotiabank

According to Tuuli McCully, Research Analyst at Scotiabank, strong Japanese economic activity has yet to feed wage gains and inflation while politics dominate the near-term outlook.

Key Quotes

“Japan’s current economic activity is stronger and more broad-based than it has been in years. Real GDP growth averaged 1½% y/y in the first half of the year, driven by domestic demand, particularly household consumption and fixed investment. In addition, Japan’s external sector is responding to strengthening global demand and international trade, with net exports contributing to real GDP gains. We expect Japan’s economic growth to average 1.6% y/y in 2017, well above the nation’s potential growth rate of around ½% y/y. We estimate that output gains will be lower—and more sustainable—in 2018–19, averaging 0.9% y/y.” 

“Japan’s inflationary pressures remain low. Despite a tight labour market, higher corporate profits and a recent pick-up in business investment, wage increases remain muted, questioning the sustainability of Japan’s recovery. Until we see solid wage gains, Japan’s inflation is set to stay low. In recent months price increases have hovered near ½% y/y. Should Japan’s consumption tax rate be hiked from 8% to 10% in October 2019 as currently planned, inflation will break the BoJ’s 2% y/y inflation target in the final months of 2019, mimicking the price evolution after April 2014 when the tax rate was raised from 5% to 8%. However, excluding this temporary impact, inflation will likely stay below the 2% mark in the foreseeable future.”

“The Bank of Japan (BoJ) is expected to maintain loose monetary policy through our forecast horizon. The short-term policy rate will likely remain at -0.1% and the BoJ will continue to adjust the amount of its bond purchases depending on market developments, aiming to keep the 10-year government bond yield relatively close to 0%. While cautious alterations to the BoJ’s asset purchase program are possible before the end of 2019, we do not expect the policy rate to be increased within our forecast horizon.”

Author

Sandeep Kanihama

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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