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Japan: Strong but very globally dependent economic upturn - Danske Bank

Analysts from Danske Bank expect the Bank of Japan to stay on hold for the coming year and then increase the 10-year target rate to 0.25 % in H1 19 in the wake of a global steepening of the yield curve.

Key Quotes: 

“We expect GDP growth to end up at 1.6% in 2017. Going forward, we expect to see growth closer to trend as fiscal stimulus wanes. We forecast 1.3% in 2018 and 0.8 % in 2019.

“Reflating the economy is a lengthy process. For the time being, we believe PM Shinzo Abe and the Bank of Japan can only hope the global economic upswing lasts long enough for it to happen.”

“We see the main risks to the current economic recovery as a Chinese slowdown and the planned October 2019 consumption tax hike.”

“The BoJ is for sure speculating how to best ease out of the current extremely dovish stance. In our main scenario, we expect long global yields to increase and this should make room for the BoJ to increase the target rate on 10-year government bonds. As long as we are not seeing any pickup in core inflation and long global yields remain low, we believe it is too soon, though. A policy tightening would strengthen the yen, potentially hurting the export-driven economic upturn. However, you cannot get too close to the tax hike at end-2019, as this already imposes a risk for growth momentum. We expect, the BoJ to increase the 10-year target rate from the current 0.0% to 0.25% sometime during H1 19.”

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