Inflation has started to pick up but…


… the momentum is not strong. A meaningful hike in long-term JGB yield targets and an end of the negative interest rate policy may only occur in the 2019-2020 period, in our view.
Ma Tieying10 Apr 2018
Photo credit: AFP Photo


Despite the monthly data volatility caused by the bitterly cold weather and the New Year holidays at the beginning of 2018, the trajectory of Japan’s growth recovery remains unchanged. We maintain our gross domestic product (GDP) growth forecasts at 1.1% for this year, lower than the 1.6% estimated for 2017, but slightly higher than the long-term average of 1.0%.

Among the key leading indicators, the January to February purchasing managers’ index (PMI) suggests that manufacturing activities will remain expansionary in 1Q18. The consumer confidence index at a five-year high also points to a sanguine outlook for domestic demand. The near-term growth prospects continue to be aided by the cyclical recovery in exports, capital spending in the tech sector, falling unemployment, and modest wage increases.

The impact of February’s financial market volatility should be limited. The Nikkei’s rally in the past five years has drawn strong interest from foreign investors – foreign ownership ratio in Japanese equities increased to 30% in 2017 from 26% in 2012. But the participation of domestic retail investors was limited – the ownership ratio fell to 17% from 20% during the same period. The stock market rally under Abenomics did not help much in lifting Japan’s consumption growth. The recent correction should not have serious depressing impact on consumption as well.

As the economy further recovers and the output gap widens, inflation has started to pick up, but the momentum is not strong. The rise in headline CPI to 1.4% in January was mainly attributed to the surge in fresh food prices amid the cold weather. Given the end of the winter season, the recent softening of oil prices and appreciation of the yen, headline CPI is likely to ease around March. The core CPI (a better gauge of the underlying, demand-side price pressures) has risen marginally to 0.4% in January 2018 from 0.3% in December 2017. We expect it to continue to inch upward through this year, but remain below the 1% mark by end-2018.

The Bank of Japan (BOJ) is not ready to normalise monetary policy or to allow the yield curve to steepen, as judged from its fixed-rate operations and increase in bond purchases in February. Meanwhile, note that Haruhiko Kuroda has been nominated by the government for a second term as the BOJ governor. The nominees for the two deputy governor positions – BOJ Executive Director Masayoshi Amamiya and Waseda University Professor Masazumi Wakatabe – are also strong supporters of Abenomics. In a bid to achieve the reflation goal, the BOJ is expected to stay the course on a loose monetary policy under the new board this year. A meaningful hike in the long-term yield targets and an end of the negative interest rate policy may only occur in the 2019-2020 period, in our view.

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  Ma Tieying
Economist - Japan, South Korea, & Taiwan
matieying@dbs.com

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