Japan Economic Outlook 2019

Comprehensive GDP data for the first quarter confirmed that the relatively robust expansion was mostly propelled by a sharp decline in imports of goods and services. Underlying domestic demand, meanwhile, appeared weak as reflected by lackluster private consumption in Q1, raising concerns over Prime Minister Shinzo Abe’s plans for household demand to drive economic growth. Turning to the second quarter, consumer confidence tumbled to an over three-year low in May, which does not bode well for a recovery in consumer spending and leaves Abe at a crossroad whether to move ahead with a controversial sales tax in October. Japan’s economic prospects are quickly worsening as escalating trade tensions, especially between China and the United States, could further erode global demand and, in turn, Japan’s all-important external sector.

Faltering global demand is expected to weigh on growth this year. Conversely, the economy should benefit from frantic front-loading of consumer purchases ahead of October’s sales tax. The key downside risks are further trade restrictions, which would reduce demand for Japanese goods, as well as weaker global growth, which could strengthen the yen. FocusEconomics panelists see the economy growing 0.8% in 2019, which is unchanged from last month’s forecast, and 0.5% in 2020.

Inflation jumped to 0.9% in April from 0.5% in March. Price pressures nevertheless remain relatively muted, mostly reflecting Japan’s firmly entrenched deflationary mindset, strong productivity gains and increased competition largely thanks to technological progress. Looking forward, the sales tax hike scheduled for October should boost inflation significantly. FocusEconomics panelists expect inflation to average 0.8% in 2019, which is unchanged from last month’s estimate, before reaching 1.1% in 2020. 

The Bank of Japan (BoJ) kept its monetary policy on hold and forward guidance was unchanged at the 19–20 June meeting. The Bank supported its decision on the back of subdued inflationary pressures and an uncertain global economic outlook. That said, the BoJ could expand its monetary stimulus as soon as in Q3 in the event of a rate cut by the Fed. A majority of FocusEconomics panelists expect the BoJ’s short-term policy rate to remain unchanged at minus 0.10% until at least the end of 2020.

Rising global trade tensions continued to fuel demand for safe-haven assets in recent weeks, leading the yen to strengthen against the U.S. dollar. On 20 June, the yen traded at JPY 107.3 per USD, appreciating 2.6% month-on-month. Looking forward, the evolution of the yen will be mostly determined by external events such as the trade war and global growth prospects. Panelists see the yen trading at JPY 108.1 per USD at the end of 2019 and at JPY 106.7 per USD by the end of 2020.

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