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Japan Economics Update

Japan Economics Update

Weaker yen won’t provide a big boost to net exports

With Japan’s terms of trade set to improve only modestly and interest rates differentials moving further against the yen, we expect the exchange rate to fall to 140 against the dollar by year-end. But this currency weakness will provide only a small boost to Japan’s net export volumes.

19 May 2022

Japan Economics Update

Large pot of pandemic savings to collect dust

The hit to household incomes from higher inflation will be much smaller in Japan than elsewhere and consumers have plenty of pandemic forced savings to tap into to sustain spending. But we nonetheless expect the rebound in consumption to disappoint over the coming months as consumers are spooked by rare price hikes to everyday items and some remain wary of catching the virus. China Drop-In (12th May, 09:00 BST/16:00 SGT): Join our China and Markets economists for a 20-minute discussion about near to long-term economic challenges, from zero-COVID disruptions to US-China decoupling. Register now.

11 May 2022

Japan Economics Update

Weaker yen will help lift underlying inflation to 2%

The pass-through of higher import costs resulting from the weaker yen and soaring energy prices will lift underlying inflation close to the BoJ’s 2% target by the end of the year. However, with wage growth unlikely to pick up in response, inflation will fall back below 1% next year. Accordingly, the Bank of Japan won’t respond by hiking interest rates.

4 May 2022
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Japan Economics Update

BoJ may yet widen its tolerance band

The Bank of Japan resisted the temptation to widen its tolerance band for 10-year JGB yields today, but it did outline that it will from now on conduct unlimited fixed rate auctions every business day until yields drop back comfortably below its ceiling of 0.25%. While that has pushed down yields for now, we still think the Bank will eventually choose to widen its tolerance band to ±0.50%. Bank of Japan Drop-In (29 April, 15:00 SGT/08:00 BST): We’ll be discussing whether the Bank of Japan can get a grip on JGB yields and the yen in a special online briefing on Friday. Register now

Japan Economics Update

BoJ to widen 10-year yield tolerance band further

With US Treasury yields set to keep rising over the coming year, it will become even more difficult for the Bank of Japan to defend its target for 10-year JGB yields. While we don’t expect the Bank to abandon Yield Curve Control altogether, we think it will widen its tolerance band further, perhaps to ±50bp.

Japan Economics Update

The yen’s depreciation has further to run

We think the yen will drop even further as policy divergence widens. We now forecast USD/JPY to reach 140 by the end of this year, before dropping back as the Fed takes its foot off the gas in 2023. In view of the wider interest, we are also sending this FX Markets Update to clients of our Japan Service.

22 April 2022

Japan Economics Update

Four questions on FX intervention

With the yen falling to a 20-year low against the dollar, talk of foreign exchange market intervention is growing. While we think the bar for any intervention is high, this Update answers some key questions. In view of the wider interest, we are also making this Japan Economics Update available to clients of our FX Markets Service.

Japan Economics Update

Yen intervention may not work and benefits unclear

The yen isn’t obviously undervalued so it isn’t clear whether attempts to weaken it would work. Most importantly, the Bank of Japan remains convinced that a weaker yen is beneficial for Japan’s economy.  

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