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Japan Data Response

Japan Flash PMIs (May 2022)

While the flash manufacturing PMI was little changed in May, the details suggest that supply shortages worsened yet again, weighing on output and lifting prices.

24 May 2022

Japan Chart Book

Tweak to Yield Curve Control still on the table

The Bank of Japan’s attempt to relieve pressure on the Yield Curve Control framework by offering to buy an unlimited amount of 10-year Japanese government bonds (JGBs) at yields of 0.25% for as long as necessary appears to have done the trick so far. Despite offering to do so every working day, the Bank hasn’t yet had to buy any bonds through the fixed rate method in May. The Bank’s latest confidence trick – along with the recent fall in global yields – has dissuaded the bond vigilantes for now. However, we think that the Bank will have to defend its ceiling with heavy purchases once again if – as we expect – US Treasury yields start rising again. And media reports suggests that some of the public are pinning blame on the BoJ for rising prices stemming from a weaker yen. As such, there’s still a good chance that the BoJ will ultimately decide to relieve pressure by widening its tolerance band on 10-year yields from the current ±0.25% to ±0.50% later this year.

23 May 2022

Japan Economics Weekly

Japan to outperform as cost of living rising less sharply

GDP shrank yet again in Q1 as the Omicron wave brought the recovery in consumption to a halt. However, services spending was more resilient than we had anticipated and there are good reasons to think that Japan’s economy will outperform other large advanced economies over the coming quarters.  

20 May 2022

Key Forecasts

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Latest

Q2 2022

Q3 2022

Q4 2022

Q1 2023

2022

2023

2024

GDP

-0.2(0.5)

1.7(1.7)

1.1(3.6)

0.6(3.3)

0.6(4.2)

(2.3)

(2.7)

(1.2)

Private Consumption

0.0(2.1)

1.7(3.1)

0.8(5.0)

0.5(3.0)

0.6(3.6)

(3.3)

(2.5)

(1.1)

Consumer Prices

(2.5)

(2.3)

(2.3)

(2.5)

(1.8)

(2.0)

(1.1)

(0.3)

Unemployment Rate (%, average)

2.6

2.6

2.5

2.5

2.4

2.6

2.4

2.4

Policy Rate (%)

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

-0.10

Monetary Base (¥ Tr, average)

683

687

697

700

705

700

720

740

10 yr JGB yield target (%)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

TOPIX, end period

1872

1,898

1,850

1,800

1,850

1,800

2,000

2,175

¥/$, end period

127.7

122.4

132.1

136.1

140.0

140.0

130.0

120.0

¥/Euro, end period

135.1

136.7

136.9

138.5

140.0

140.0

143.0

143.0

¥/£, end period

159.1

160.9

164.8

168.7

170.8

170.8

169.0

162.0

Sources: Bloomberg, Thomson Reuters, Capital Economics


Japan to outperform as cost of living rising less sharply

Japan Economics Weekly

25 May 2022

Our view

We now expect the weaker yen and rising input costs to bring underlying inflation close to the Bank of Japan’s 2% target. While inflation will remain much lower than in other advanced economies and the hit to household incomes correspondingly smaller, households are nonetheless worried about rising prices for everyday items. And with virus concerns still lingering, consumption growth will remain modest despite the still-elevated household savings rate. As such, we expect the Bank of Japan to keep its interest rate targets low for the foreseeable future. However, we think that the Bank will face increasing difficulties in defending its 10-year yield target as overseas yields continue to surge and we think it will eventually bow to the pressure and widen its tolerance band to ±50bp.

Latest Outlook

Japan Economic Outlook

BoJ’s Yield Curve Control under threat

We expect Japan’s economic output to return to its pre-virus path by the end of the year. With the recovery from the pandemic complete, we expect GDP growth to slow from 2.7% this year to just 1.0% in 2024. The Bank of Japan won’t respond to inflation rising above its 2% target by raising short-term interest rates as soaring energy prices rather than stronger underlying price pressures are the main driver. However, there’s a growing risk that it will give up control over longer-term interest rates if it is forced to keep buying large amounts of bonds to defend its 10-year yield target.

30 March 2022