- 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.
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