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According to Danske Bank analysts, the Japanese economy is still strong with solid domestic demand while the labour market is historically tight and the service sector has held up well on the back of decent household consumption, strong investments and an accommodative fiscal stance.

Key Quotes

“Supermarket scanner data imply consumption is affected more severely than expected by the BoJ. October flash PMIs also took a turn for the worse, with service pulling the composite PMI below 50. That said, the typhoon that hit big parts of the country a few weeks ago might be distorting the data and we will need more information on Q4 before any conclusions can be drawn. Consumers’ reaction to the VAT-hike will be important to watch for policy makers, though. We expect the updated projections for both GDP and inflation to be revised down for the coming years, while the FY2019 GDP forecast will likely be revised up on the back of a strong year so far.”

“A strengthening of the JPY of about 4% y/y poses a headwind for exporters along with the global slowdown, which has caused a decline in demand for especially semiconductor manufacturing parts. Even so, export volumes were up 2.7% y/y in September and we expect GDP-growth around 1.5% q/q annualised in Q3.”

“As risk factors unfold, the tide could turn, though. The global economic outlook is a big risk for Japan. The US-China trade war is key, with the US and China as the two most important trading partners but the course for global monetary policy could be just as important. With an economy running on the safe-haven JPY, Japan is sensitive to the decisions of the Fed, the ECB and PBoC.”

“On the one hand, there is a risk that global easing forces the JPY stronger, when BoJ will not be able to respond fully to easing measures abroad. However, BoJ also faces the risk that the global monetary policy response is not sufficient to curb a threatening downturn in economic activity in which case we have a global recession and an unsustainable situation for Japanese exporters who face declining global demand enforced by further JPY strengthening causing a deterioration of competitiveness. We believe the latter is the biggest risk.”