Evidence of Japan’s struggles to growth since late 2016 continues to mount. Incidents of recent years in Europe show that weak economic growth typically sets off new rounds of volatility in financial markets.
Since November 2016, the yen has gained about 25% against the dollar and interest rates in Japan have declined from +0.9% to -0.6%.
Macroeconomic factors were at play last month, which was just the second negative indicator we’ve seen in five months of 2019 global economic momentum estimates. But considering Japanese business surveys also noted a dip, we think this is a healthy sign for the economy, and will likely drive further yen depreciation.
Quarterly Data Week Round-Up
Economic data last week out of Asia put little pressure on currency markets, although markets are watching fresh data from the European and US later this week for hints as to what the second quarter may bring. Our strong guide to US GDP in Q2 2018 (previously released in April) is on track for an upward revision to +3% from +2.8%.
Last week, the Japanese economy slowed in the first quarter and will need to rebound sharply to improve for the year to 0.0% growth, the median expectation of private economists.
Core consumer prices fell, reflecting another drop in gasoline prices. Japanese jobless claims fell and the coreless-with-hires rate remains near its lowest levels in 14 years, suggesting robust labor demand.
World Expected to See Disappointing Global Growth
Central banks across the world are now debating policy re-balance, and forward guidance is no longer providing the ironclad confidence necessary to support asset prices at much higher price levels. Last week we discussed how some central banks, like the US Federal Reserve, are beginning to admit that their efforts to slow rate increases risk setting off new rounds of volatility in financial markets.
Among others, central banks in Sweden, Denmark, and Switzerland have been looking toward additional accommodation in 2018, and more easing may not be far behind. Japan’s unprecedented, and perhaps far-fetched, Bank of Japan easing programs are ending soon and beginning to lift their economy. The Bank of England is facing diminishing risks and will likely hike rates in August. The European Central Bank (ECB) is in its final years of asset purchases, but the amount remains significant relative to its money supply – but it is now debating whether or not to decrease stimulus for the first time in almost seven years.
A Bank of Japan study last year found that big run-ups in the currency could torpedo the country’s economic recovery, suggesting Japan’s large current account surplus is unsustainable. The report noted that previous negative currency effects led to deflationary pressures in the Japanese economy, which ultimately hindered growth. Overall, it concluded that strong fluctuations in the Japanese currency could lead to a more stable (but weaker) economy than a currency that is stable but weaker.
The conclusions would echo those drawn by the Federal Reserve and the European Central Bank last year.
Read related economic commentary:
Many policy makers warn of risks to global growth
Trump administration makes progress on trade deficit with Japan
More evidence that this economy has run out of gas
Our predictions in 2018 (13%) are about 12% below our long-term outlook, and about 1% below the median estimate of most global forecasters.