Growth to fall short of expectations

The sales tax hike has not been as damaging as many had feared. But we remain more pessimistic about the outlook for global growth and domestic investment than most. That explains why we expect GDP to contract by 0.2% this year rather than expand by 0.3% as anticipated by the analyst consensus. Even so, we expect the Bank of Japan to keep interest rates unchanged as capacity shortages remain pronounced. Markets have now come around to this view, having previously been pricing in cuts. The shift pushed up 10-year JGB yields but they are unlikely now to rise much further.