Source: AFP
Japan’s economy is proving more resilient this year compared to America’s and China’s sharp slowdowns, and rising recession risks in Europe. We upgrade our GDP forecasts and project growth in 2023 as the economy is set to avoid recession.
Source: Bank of Singapore, Bloomberg.
In Japan, consumption is firming as activity reopens from the pandemic. August’s retail sales rose 1.4% month-on-month (MoM) and 4.1% year-on-year (YoY) and will benefit further when full border controls on tourists are lifted this month. Similarly, August’s industrial production also beat expectations for the third month in a row, surging 2.7% MoM and 5.1% YoY on strong demand for cars and semiconductors. In addition, the weak JPY is boosting profits for the Nikkei.
Source: Bank of Singapore, Bloomberg.
The Bank of Japan (BoJ) is supporting growth too by capping 10Y bond yields ‘around 0%’ as it seeks to reverse three decades of weak inflation. The first chart shows low yields are shielding Japan’s equities when global stock markets are being hit by interest rate hikes. The next chart shows the core inflation of 1.6% is finally near the BoJ’s 2% target.
Source: Bank of Singapore, Bloomberg.
However, the JPY has hit 24-year lows of 145 against the USD despite Tokyo intervening for the first time since 1998, selling USD20 billion of FX reserves to defend the JPY as the last chart shows. JPY weakness and rising inflation may spur the BoJ to lift its -0.10% deposit rate after Governor Kuroda retires in April, causing yields to surge. The risk of a less dovish BoJ keeps us neutral on Japan’s economic outlook despite this year’s resilience.
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