Economy

Rising U.S. rates present greatest risk to Japan but recession unlikely: Stocksak survey By Stocksak

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© Stocksak. FILE PHOTO – Banknotes made of Japanese yen can be seen in this illustration taken September 22, 2022. REUTERS/Florence Lo/Illustration

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By Kantaro Komiya

TOKYO – A prolonged period of U.S. tightening will be the biggest threat to Japan’s economic health over the next year, but the majority polled by Stocksak believe Japan is unlikely to enter a recession.

The survey result Tuesday came as Japan struggles with its currency’s recovery from a 32-year low against the dollar. This is largely due to diverging yields between Japan and the United States.

The Oct. 11-20 survey revealed that 17 of the 29 economists who answered the question about what was the most dangerous for Japan’s economy in the next year, or 59%, chose longer-than expected rate hikes by Federal Reserve.

The Fed’s aggressive rate action would prolong and deepen the U.S. recession, which would spill over to the global economy and in turn hit Japanese exports, said Harumi Taguchi, principal economist at S&P Global (NYSE:) Market Intelligence.

“It could also have worrying implications on (Japan’s) corporate spending, wages, as firms find it more difficult than ever to transfer rising cost burdens stemming form the sharp decline of the yen,” she said.

The International Monetary Fund and other policymakers have reduced their global growth projections for 2023 due to rising prices and higher borrowing costs.

The October Stocksak poll question allowed for up to two choices regarding the greatest risks to Japan’s economic health. 15 respondents chose “a slowdown of U.S. and European growth”, while 11 selected the equivalent for China. China is Japan’s largest trade partner.

Seven more said that the weakening yen and the persistent price increases posed the greatest danger.

“The Japanese dollar could depreciate up to 170 against it,” said Chiyuki Takamatsu (chief economist at Fukoku Mutual Life Insurance).

Three were selected for “geopolitical instability”, such as over North Korea and Taiwan, and one was chosen for “new coronavirus varieties”.

Although most economists agree that these risks will not plunge Japan into recession, they stated that this was mainly due to a low base.

Takamtasu of Fukoku said that Japan’s economy looks strong compared to other countries, but that is only because the country’s recovery from pandemic has been slow. “It’s still in catch-up growth.”

FOGGIER POLICY OUTLOOK, HIGHER INFLATION

The poll showed that respondents expected consumer inflation will remain above the BOJ’s 2% target through April-June 2023, before cooling down to 1.0% or lower in the final three month of next year.

Japan’s core consumer price index rose 3.0% in September on higher energy and raw material costs, which was the highest level since 2014.

Three quarters of economists predicted no change to Japan’s massive monetary ease at least until the second-half of 2023. However, the BOJ’s policy prospects remain murky due to difficulty in predicting when the Fed will pivot.

Twenty-five out of 28 economists believed that the central banks’ next policy change would be to reduce its easing. While 19 predicted that a tweaking to its forward guidance was the most likely, twenty-five said so.

Eleven suggested that raising the 10-year yield target to “around 0%” or increasing the yield fluctuations cap to around 0.25% could be options.

The poll also revealed that 34 respondents thought the Japanese economy would grow by 2.0% annually in October-December. This is slightly higher than the 1.9% forecasted in September.

Projections for the first quarter of 2023 were also increased by 0.1 points each.

(For more stories from the Stocksak global longer-term economic outlook polls package, click here:

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Stocksak Editorial

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