Japanese economy and the yen in 2018

• The Japanese economy is expected to decelerate, as the stimulus from the JPY 28 tr (5% of GDP) will fade. At the same time, private consumption is likely to be weak on the back of a structurally subdued wage growth. Because potential growth rate remains low with limited structural reform, business investments are likely to be replacement rather than capacity expansion.
• Inflation to increase in 2018 and 2019 but still below the Bank of Japan’s (BoJ) target: Core inflation is expected to be limited to about +0.7%, because of subdued wage growth. Headline inflation in 2019 is expected to increase to +1.3%, as the consumption tax rate will be raised from 8% to 10% in October 2019.
• On fiscal policy: Our scenario assumes a consumption tax hike in October 2019 to 10%. Because we expect a rather strong global economy increasing exports from Japan, it would be difficult to justify to postpone the hike once again. No additional fiscal expenditure is expected.
• Status quo for BoJ’s monetary policy: As the BoJ struggles to meet the 2% inflation target. It will continue to carry out its current strategy, namely quantitative and qualitative easing (QQE).
• All in all we expect the yen to depreciate slightly to 114 by end of 2018.

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