Reem Aboul Hosn
Reem Aboul Hosn

Stop-Start Growth in Japan: Yen is controlled so BOJ can drop inflation goal. Could the worst be behind?

By Reem Aboul Hosn, Research and Market Analyst Officer, CFI Ltd

While Japan’s economic rebound modestly in the fourth quarter, from a sharp contraction in third quarter, driven by business investment and capital expenditures. Yet recent measures of factory output and exports point to a lower outlook for 2019. Despite the upward revision, data suggests that the economy has reached a turning point to the downside. During the fourth quarter the GDP expanded at an annualized rate of 1.4%, capital expenditure increased 2.7% up 2.4%. Investment by companies has been one of the main engines of Japan’s economy, though a recent slowdown in corporate earnings has worried the outlook.

Bank of Japan introduced the monetary easing in late 2012 as an “arrow” stage of Abenomics, Prime Minister Shinzo Abe’s economic reform program – policy, which has contributed to the creation of about 2.5 million jobs. But has the reliance on generous monetary conditions since 2012 to sustain growth gone too far?

Difficult task

Haruhiko Kuroda, as a governor of Bank of Japan faces a difficult 2019.

Japanese exports slumped last month in the latest sign that economies across Asia are suffering because of China’s slowdown and as uncertainty persists over the outcome of US-China trade talks. Meanwhile, Japan’s exports may dip further given the recent strengthening of the yen, which makes Japanese products less price-competitive overseas. With inflation of 0.2% still far from its 2% target and growing concerns over slowing demand from China and global trade tensions affecting Asian supply chains; this standoff between Tokyo and business leaders is one reason why BOJ is unlikely exiting its loose monetary policy.  

In parallel, the job market is the tightest in decades, with the unemployment rate near the lowest level since the early 1990s at 2.5%. For Japan, the 2019 fiscal measures are promising to the economy though it is still unclear how much with the tax burden affect consumer spending and corporate earnings. However the aim is to help fund the growing cost of providing social security to a fast-growing population, and bring the country out of slump.

As things stand, central bankers in Japan, the US, and Europe are facing the same challenge: an economic slowdown that is at increasing risk of turning into a recession. And if things get worse before the banks manage to end the stimulus measures, following the global financial collapse a decade ago, they will not be equipped with the adequate tools to deal with such a crisis.

Technical Analysis

The JPY has been one of the outperformers this year so far. Fears of a global recession fuelled demand for the yen as a safe haven. The BoJ is no longer expected to raise the yield target in 2020 given the downgraded inflation outlook.

The Japanese Yen ended the week close to 111 against the U.S Dollar. Overall, the bias in prices is sideways and prices are vulnerable to a correction towards 110 or rebound to 112.