Japan Economics Viewpoint
Ready for ignition
18 November 2016
Key takeaways
° We are upbeat on Japan's outlook and think consensus is underestimating the strength of medium-term GDP and inflation.
° While the consensus looks for just 0.8% growth next year, we expect growth of 1.4% in CY17 and 1.2% in CY 18.
° With inflation moving in the right direction, we expect BoJ to keep its rates targets unchanged for the foreseeable future.
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Consensus underestimating GDP and inflation
We are upbeat on Japan's outlook and think consensus is underestimating the strength of medium-term GDP and inflation. We expect growth of 1.4% in CY2017 and 1.2% in CY2018, well above consensus of just 0.8% growth next year. For the first time in four years both monetary and fiscal policy are supporting growth. The combination of modestly higher commodity prices, a weaker yen, and a tightening output gap should drive Japan-style core inflation to 1.0% in CY2017, and 1.4% in CY2018. We expect the BoJ to keep its rate targets unchanged for the foreseeable future as inflation moves in the right direction.
Fiscal and monetary policy realigning
For years Japan has oscillated between loose and tight fiscal policy. Japanese policymakers now seem to be on the same page and we see little risk of another policy error. If anything, we see upside risks from greater fiscal stimulus via a third supplementary budget or a relatively aggressive FY17 ordinary budget. Meanwhile,
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