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Japan's economic pullback will be temporary - RBS

FXStreet (Łódź) - Junko Nishioka and Long Hanhua Wang, economists at RBS argue that despite the rising pessimism towards the Japanese economy, the current pullback will not last long enough to force a delay of the second sales tax hike.

Key quotes

"Last week, the business condition CI (coincident indicator) marked consecutive declines, garnering market interest as it signalled a 'possible turning point' of the domestic economy from its expansionary phase."

"While a change is just within the range of possibilities at this point because assessments of economic peaks and bottoms occur afterwards, we expect stronger uncertainty about a second consumption tax hike decision being debated through year-end and the BoJ's stance on additional monetary easing."

"The previous economic pullback ended quickly in just seven months, from May 2012 (peak in April) through November 2012 (provisional)."

"The consumption tax hike in April this year had a moderately larger impact than we expected, but this is not enough to cause a recession, in our opinion. Key differences from the previous pullback are 1) a recovering US economy, 2) improved job and income conditions, and 3) anticipated inflation firmly in positive territory."

"While these conditions continue to suggest sustained recovery, we do not see a significant risk of the Japanese economy trending down due to slower activity in Europe and Asian emerging countries and, hence, anticipate robust resilience to weather the phase change."

"We do not expect this weakness to push the Japanese economy into a recession, or to delay the second consumption tax hike, or even prompt additional monetary easing in the near term."

"Household income is not fragile enough for weaker overseas demand to immediately undermine domestic final demand, taking into account the wage uptrend that has taken hold amid tighter labor market conditions and increasing workforce participation. In fact, the Japanese economy was less resilient in 2012 during the previous 'mini recession' in terms of labor market conditions."

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