May 23, 2019

Japan: What can the BoJ do in case of a slowdown?

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In Short

Long-term JGB yields will broadly follow the US example with much lower amplitude. The Topix looks deeply undervalued but short term remains hostage of weak earnings, a possible macro deterioration and low yields.
Japan: What can the BoJ do in case of a slowdown?
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Highlights:

  • Japan’s economy faces a number of risks in 2019/20. Among them are the uncertain global outlook, which could spill over into domestic investment, and the planned sales tax hike from 8% to 10% in Oct. 2019. In our main scenario, we expect soft annual growth to be kept, but Japan can easily fall into a technical recession.
  • Recently, the Bank of Japan (BoJ) confirmed to keep its monetary policy unchanged until at least spring 2020. In our base case, this policy will be maintained at least throughout 2020. By contrast, a recession would force the BoJ to act but would also reveal that it has largely run out of powerful ammunition.
  • Markets have repeatedly speculated that the BoJ would need to revise its inflation targets lower. While we consider this thinking reasonable, we expect such a strategy change to happen only long-term.
  • Long-term JGB yields will broadly follow the US example with much lower amplitude. The Topix looks deeply undervalued but short term remains hostage of weak earnings, a possible macro deterioration and low yields.

Read the full publication below.

JAPAN: WHAT CAN THE BOJ DO IN CASE OF A
SLOWDOWN?

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