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A higher corporate tax would reduce corporate sector surpluses and could stimulate demand if the additional revenue were used to finance higher public spending or transfers to households. But the tax would have to be raised to implausibly high levels to …
17th April 2023
Japanese banks have nearly doubled their lending to overseas non-bank financial intermediaries over the past decade. Some of this reflects purchases of collateralised loan obligations, most of which are highly-rated. But the bulk of that lending is very …
30th March 2023
With bond yields now dropping back again, the drag from unrealised losses on banks’ capital ratios should start to reverse. However, a sharp increase in losses on banks’ foreign loan portfolio has yet to materialise. While our view that major advanced …
21st March 2023
While the Credit Suisse rescue might draw a line under that particular institution’s problems, it is clear that confidence in the financial sector overall is still extremely fragile. So regardless of whether more financial institutions run into trouble, …
20th March 2023
This year’s Shunto should result in the strongest negotiated pay hikes in decades. But the average Japanese employee will have little to rejoice in. Weaker corporate profits as well as a likely loosening of labour market conditions on account of a …
15th March 2023
The Bank of Japan didn’t make any policy changes at Governor Kuroda’s last meeting today but we expect incoming Governor Ueda to abandon Yield Curve Control in April . While that decision was widely anticipated, we were among the few who predicted the …
10th March 2023
The higher bond yields that would follow abandonment of Yield Curve Control would make it more difficult to stabilise Japan’s public finances. But the long maturity of government debt means that the government’s interest rate bill would only creep up …
22nd February 2023
The conventional wisdom is that the annual spring wage negotiations (Shunto) are a bellwether for wage growth. In reality, the small number of employees covered by the talks and their bias towards workers in large manufacturing firms means that the Shunto …
30th January 2023
While the Bank of Japan pushed back against expectations that it would end its Yield Curve Control (YCC) policy yesterday, we think it is only a matter of time before YCC bites the dust. That suggests further upward pressure on the yield of JGBs and the …
19th January 2023
The BoJ kept policy settings unchanged today, but the increase in its medium-term inflation forecasts supports our view that Yield Curve Control will be abandoned once a new Governor takes over in April . Following the unexpected widening of the tolerance …
18th January 2023
The nomination of a less dovish candidate to succeed BoJ Governor Kuroda would probably signal that Yield Curve Control will soon be abandoned, though we would still expect the Bank to keep its short-term policy rate at -0.1%. This would result in a …
4th January 2023
The jump in bond yields and the further strengthening of the yen following the widening of the Bank of Japan’s tolerance band for 10-year JGB yields will lower the value of assets owned by Japanese investors. Insurance firms will be most affected by …
21st December 2022
The surge in government bond yields around the world in response to today’s decision by the Bank of Japan (BoJ) to tweak its policy of Yield Curve Control (YCC) highlights the risks to international markets posed by the country’s huge investment overseas. …
20th December 2022
The Bank of Japan’s unexpected decision to alter its yield curve control (YCC) policy has led to a surge in the yen today; we now expect the USD/JPY rate to drop further, reaching 125 by end-2023. The yen has jumped by ~3% against other major currencies, …
Wider YCC band not start of tightening cycle The Bank of Japan today tweaked its Yield Curve Control (YCC) settings by widening the tolerance band around its yield target but we don’t expect it to hike its short-term policy rate anytime soon. The Bank’s …
A mooted adjustment to the joint statement between the Bank of Japan and the government has been widely interpreted as a step towards the withdrawal of ultra-loose policy. However, the policy implications of giving the Bank more flexibility in meeting its …
19th December 2022
We expect inflation to remain above the Bank of Japan’s 2% target through the middle of next year despite government utility price caps and falling non-food inflation over that period. One reason is that higher food import prices in recent months will …
12th December 2022
We still expect consumer spending to rise rapidly over the coming year. But with many overseas trading partners entering recession, exports will decline. That will prompt firms to pull in their horns and weigh on business investment. The upshot is that we …
10th November 2022
A strong rebound in working hours in the accommodation and food services sector is one reason why regular pay is growing at the fastest pace in a generation. However, there’s been a broad-based upward shift in the distribution of pay hikes so the …
8th November 2022
The Bank of Japan’s renewed difficulties in defending its 10-year yield target have prompted fresh speculation that it may abandon Yield Curve Control. However, neither concerns about the functioning of the bond market nor worries about a weaker yen …
1st November 2022
The Bank of Japan revised up its medium-term inflation forecasts while keeping policy unchanged today, but we still think that it won’t snuff out the budding virtuous cycle between incomes and wages . As widely anticipated, the Bank kept its interest rate …
28th October 2022
With the yen approaching 150 against the dollar, we now expect underlying inflation to climb to 2.5% by early-2023 instead of our previous forecast of 2.0%. But as this will happen when the global economy is in recession, we don’t expect the Bank of Japan …
17th October 2022
Central banks have the tools to deal with liquidity crises arising from rising interest rates and falling asset prices. Instead, the bigger threat is that higher interest rates produce large and simultaneous falls in asset prices that threaten the …
11th October 2022
Japanese firms’ holdings of interest-bearing assets have risen relative to their interest-bearing liabilities and some are suggesting that they benefit from rising interest rates as a result. But with domestic interest rates little changed as the Bank …
10th October 2022
The Bank of Japan kept policy loose and retained its easing bias today and we think it won’t tighten policy even as underlying inflation reaches its 2% target. As was widely anticipated, the Bank kept its short-term policy rate at -0.1% and its target for …
22nd September 2022
We think the yen will strengthen against the US dollar over the next few years, as the headwinds that have driven the currency to multi-decade lows begin to unwind. The yen has fallen nearly 20% against the greenback this year, the most of any of the …
13th September 2022
The Bank of Japan’s assets are falling for the first time since it embraced large-scale easing a decade ago, as banks are repaying emergency funds they borrowed during the pandemic. However, this is not holding back an acceleration in credit to …
6th September 2022
Japan is facing its largest terms of trade shock since the second oil crisis in the early-1980s. While we don’t expect Japan to follow other advanced economies into recession, we’re slashing our 2023 GDP growth forecast from 2.6% to a below-consensus …
30th August 2022
Soaring electricity and gas prices will help lift inflation above 3% by year-end. But with that boost unlikely to be sustained, the Bank of Japan won’t see a need to tighten monetary policy. The surge in food prices and the fading drag from last May’s …
24th August 2022
The extent to which neighbouring countries would be affected by an escalation of tensions between China and Taiwan would depend both on which sides they take and on the nature of restrictions imposed by the West and China. ASEAN countries are most reliant …
10th August 2022
Real disposable household incomes will continue to be propped up until mid-2023 by fiscal transfers intended to offset the impact of virus disruption and rising inflation. But spending will continue to be held back as consumers remain cautious amid …
27th July 2022
The Bank of Japan didn’t concede any ground to bond traders today but we still think there’s a good chance that it will widen the tolerance band around its 10-year yield target . The Bank kept its short-term policy rate at -0.1% and its 10-year yield …
21st July 2022
If Russia decided to end all exports of natural gas to Japan, we suspect that Japan’s GDP would fall by around 0.5%. However, the hit could be larger as there is now less scope to reduce energy usage than after the Great East Japan Earthquake and a bigger …
4th July 2022
The Bank of Japan gave no ground at all to bond traders today as it left all its major policy settings unchanged. Governor Kuroda was resolute in claiming that Yield Curve Control has no limits in his press conference. But the likelihood is that defending …
17th June 2022
The weakening in the yen to a 24-year low and a crack in the Bank of Japan’s ceiling on 10-year yields today is putting significant pressure on policymakers to respond. FX intervention is a possibility, but we doubt it would be effective. We suspect the …
13th June 2022
A falling fertility rate and declining employment among retirement age workers pose downside risks to our long-term forecasts for Japan’s labour force and GDP growth. However, with the female participation rate still climbing from record highs and job …
7th June 2022
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 …
19th May 2022
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 …
11th May 2022
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 …
4th May 2022
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 …
28th April 2022
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 …
26th April 2022
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. While it has stabilised over the past couple of days, …
22nd April 2022
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. 1. Who decides whether to intervene? Bank of …
21st April 2022
The yen isn’t obviously undervalued so it isn’t clear whether attempts to strengthen it would work. Most importantly, the Bank of Japan remains convinced that a weaker yen is beneficial for Japan’s economy. The yen has weakened by around 7% against the …
6th April 2022
It hasn’t failed yet but the Bank of Japan’s need to return repeatedly this week to defend the ceiling of its yield target suggests that cracks are appearing in the structure of Yield Curve Control. If maintaining it requires large-scale purchases, the …
29th March 2022
The Bank of Japan kept policy settings unchanged today and signalled that it is more worried about the negative impact of higher commodity prices on activity than about inflation spiralling out of control. Indeed, we expect the Bank to keep policy loose …
18th March 2022
The recent spike in energy prices will lift import prices in Japan by around 10%, but the increase would be twice as large if Russian energy exports were banned. Japan’s flagship manufacturing sectors have sufficient pricing power to pass on those cost …
9th March 2022
A spike in energy prices caused by significant disruption to Russian exports would lift Japanese inflation to 2% from April until the end of this year. However, the BoJ wouldn’t respond by lifting its policy rate as it wouldn’t be able to argue that …
23rd February 2022
If the Bank of Japan shortened the duration of its yield target, the impact on economic activity and inflation would probably be small but it could improve the long-term health of insurers and pension funds. It’s not clear though what could prompt such a …
22nd February 2022
With economic activity still depressed by recurrent virus waves, the sharp slowdown in immigration to Japan has yet to put much upwards pressure on wages. However, looking ahead we think some sectors could be hit by a rise in labour costs if the border …
9th February 2022
