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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

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 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
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Japan Consumer Prices (Apr. 2022)

Inflation rose above the Bank of Japan's 2% inflation target for the first time since 2008 and we expect underlying inflation to approach 2% later this year, but this won't prompt the Bank to tighten policy.

20 May 2022

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 External Trade (Apr. 2022)

Export volumes fell in April, and they are likely to remain subdued over the coming months until supply shortages dissipate and allow exporters to make up for lost ground.

19 May 2022

What would tighter monetary policy mean for Japan?

We don’t expect the Bank of Japan to tighten monetary policy meaningfully but, with inflation about to breach 2%, what if we are wrong? The direct impact of higher interest rates on the corporate sector would be manageable, but a stronger yen would weigh on corporate profits and business investment. Higher rates would also restrain housing-related activity and would probably cause a housing downturn, with the resulting fall in household wealth weighing on consumption.

Japan GDP (Q1 2022 Preliminary)

Japan’s economy only contracted slightly in Q1 as consumption held up well despite prolonged restrictions during the Omicron wave. But while the economy will bounce back this quarter, we think Japan’s delayed reopening recovery will look weak when stacked up against the reopening rebounds in other advanced economies last year.

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