JPY appreciation likely to have asymmetric impact on economy and prices - Nomura

Analysts at Nomura now posit a stronger yen, and think this will have an asymmetric impact on the Japanese economy and on prices.

Key Quotes

“We now assume all-Japan core CPI (all items, less fresh food) of +0.7% y-y for FY17, +1.0% for FY18, and +0.7% for FY19, with downward revisions of 0.2ppt and 0.1ppt for FY18 and FY19 respectively versus our prior estimates as of 8 March 2018.”

“We also now forecast real GDP growth of +1.8% y-y for FY17, +1.2% for FY18, and +0.9% for FY19, with a downward revision of 0.2ppt for FY18 and an upward revision of 0.1ppt for FY19. We have lowered our FY18 forecast as the revision in our forex assumption to a stronger yen will have a stronger impact on real imports than on real exports. Meanwhile, we have increased our real consumer spending forecast for FY19 in particular by 0.1ppt as the downward revision to our CPI estimate increases real household purchasing power.”

“On 16 March, the Japanese Trade Union Confederation (Rengo) released its first set of compiled data for the results of the 2018 spring wage negotiations, which showed a bigger increase in base pay in 2018 than in 2017. However, there was a smaller increase in overall wages, which includes seniority-based pay increases, and we do not expect real household incomes or spending to gain speed via growth in scheduled cash earnings.”

“Potential for change in policy mix

If a stronger yen pushed down inflation, we could well see the move out of deflation being pushed back, and we also note the possibility of increased impetus for the government to step up policy moves as a result of recent political instability. At present, we think the direction for fiscal policy is likely to be expansionary, and we also see calls for accommodative monetary policy by the BOJ.”