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

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 fail into a technical recession.

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?

RELATED INSIGHTS

COVID-19 FACTS & FIGURES
According to the IMF’s Managing Director, strong international cooperation on coronavirus vaccine could speed up the world economic recovery and add $9 trillion to global income by 2025. A WHO trial found that Remdesivir, Hydroxychloroquine, Lopinavir and Interferon have little or no effect on hospitalized Covid-19 patients. Gilead Sciences has questioned the findings of the WHO study saying data appeared inconsistent.
INCORPORATING QUANT SIGNALS INTO EU EQUITY SECTOR/STYLE STRATEGY: MAINTAIN A TILT TO CYCLICALS AND VALUE
We present an update of our proprietary equity valuation tool, based on quant models. It provides indications of over- or undervaluation for different sectors and styles of European equities, which is further enriched by our qualitative analysis. Currently, among European equity sectors, financials, energy, telecoms, and autos look undervalued while Pharma, utilities and software appear overvalued.
CHINA’S RECOVERY CONTINUED BUT A BIT SOFTER THAN EXPECTED
China's economic recovery continued in Q3 2020, although a bit softer than expected. Real GDP growth rose to 4.9% yoy, slightly below the Reuters consensus expectation of 5.2% yoy, but still a substantial upturn from the 3.2% yoy in Q2. On a quarterly base, growth dynamics softened to 2.7% qoq, after 11.7% qoq and -10% qoq in the two previous quarters.