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Commerzbank’s Volkmar Baur says solid nominal growth and higher-than-expected inflation should keep pressure on the Bank of Japan (BoJ) to raise rates again as early as September or October. Alongside a potentially improving fiscal outlook, these factors support a modestly stronger Japanese Yen (JPY) despite continued market caution after recent interventions.
Higher inflation keeps BoJ under pressure
“The Japanese economy grew by 0.3% in real terms in the second quarter compared to the previous quarter, which was significantly slower than most analysts had expected. In nominal terms, however, the economy grew by 1.2% compared to the previous quarter, as expected, meaning that overall economic inflation (the deflator) was higher than anticipated.”
“The Japanese yen has shown little reaction to this news this morning. However, there are two reasons why this should actually provide support for the yen:”
“First, growth of 0.3% compared to the previous quarter is still robust. Although the details were somewhat weaker, an annualized growth rate of 1.1% is still positive for Japan. The higher inflation should also keep up the pressure on the Bank of Japan to raise interest rates again as early as September or October, which should support the JPY.”
“Furthermore, there have been regular reports in recent weeks suggesting that Japan’s fiscal problems and high debt levels are weighing on the Japanese yen. We consider this view to be exaggerated. After all, Japan has one of the lowest budget deficits among the G10 countries, and while its debt level is high, it is at least declining.”
“However, rising yields on Japanese government bonds are making many market participants nervous. From this perspective, the high nominal growth should have a positive effect, as it should lead to higher tax revenues and thus an improved fiscal situation. The market remains cautious in the wake of the interventions. In our view, however, the fundamental improvements in the Japanese economy continue to point toward a slightly stronger Japanese yen.”
