Outlook is stable...FocusEconomics: Japan
Recent data corroborates that the anticipated recovery in Q2 was likely weaker than expected. Subdued wage growth continues to dent consumer confidence. Industrial production, furthermore, declined in May for the first time in four months. However, with a smaller-than-expected drop in industrial production and robust export growth in June, external demand appears to be fueling activity within Japanese factories. Leading indicators for Q3 signal that economic activity will remain relatively weak, mostly reflecting mounting global economic uncertainties. The Tankan survey for manufacturers showed a less positive assessment of the country’s economic outlook as trade barriers increase globally and geopolitical risks threaten to strengthen the yen. On the upside, the 2020 Tokyo Olympics is boosting capital expenditure, providing stimulus to the economy, while the new trade deal with the European Union should support the external sector. Despite decelerating from 2017’s outstanding performance, the economy should continue to expand at a brisk pace this year, supported by the Bank of Japan’s (BoJ) ultra-loose monetary policy, a tightening labor market and construction projects related to the 2020 Tokyo Olympics. Rising protectionism globally and a sharp appreciation of the yen due to persistent geopolitical threats are the main downside risks to the outlook. FocusEconomics panelists see the economy growing 1.1% in 2018, which is unchanged from last month’s forecast, and 1.0% in 2019. Inflation stabilized at May’s 0.7% in June. Although the economy is running above potential, inflationary pressures remain subdued on the back of sluggish household consumption, and are mostly supported by higher energy prices. FocusEconomics panelists expect inflation to average 1.0% in 2018, which is unchanged from last month’s estimate. Next year, the panel sees inflation inching up to 1.2%. • The BoJ left its ultra-loose monetary policy program unchanged at its 14–15 June meeting, as expected. At the upcoming 30–31 July meeting, the Bank will release its quarterly economic review, in which the BoJ could decide to yet again push back when it expects to meet its inflation target. A large majority of our FocusEconomics panelists expect the BoJ’s shortterm policy rate to remain unchanged at minus 0.10% until at least the end of 2019. The yen has depreciated to a six-month low in recent days despite rising geopolitical tensions; the yen usually acts as a safe-haven asset during episodes of uncertainty. This time, however, widening interest-rate differentials with the U.S. likely spurred the weakening. On 20 July, the currency traded at 111.4 JPY per USD, a loss of 1.0% compared to the same day in June. Panelists see the yen trading at 109.5 JPY per USD at the end of 2018 and at 106.3 per USD by the end of next year.
Charts listed below are from Mizuho Research Institute, Ltd.