BlackRock Investment Institute

Macro insights

Japan's restart gathers pace

Industrial production has now surpassed pre-Covid levels – ahead of the U.S. and euro area, despite a later restart. See the chart. The country is also benefiting from strong foreign demand for machine tools on the back of growing investment spending. The restart will likely be further boosted by a revival of consumer spending in the second half of the year – driven by the lifting of Covid restrictions amid lower cases and a broadening vaccine rollout, in our view.


Production restart

Chart showing industrial production in Japan surpassing pre-covid shock levels

Sources: BlackRock Investment Institute, Federal Reserve Board, Eurostat, Japan METI, with data
from Haver Analytics, June 2021. Notes: The chart shows industrial production by country rebased
to the start of 2020.

We see consumer spending likely to be more exuberant than cautious, due to pent-up demand, resilient domestic incomes and the excess savings built up during the pandemic. Overall, Japan’s cumulative loss in activity from the pandemic could be the smallest of all developed economies, and the country may reach pre-Covid growth levels before year end – ahead of Europe and the UK.

Inflation still a long way to go

Yet inflation stuck stubbornly below target suggests monetary policy will likely need to stay highly accommodative for the foreseeable future. The Bank of Japan (BOJ) – which meets this week – is still forecasting inflation a full percentage point below its target in three years’ time. We see any rise in interest rates as likely being a long way off.

We would also push back against interpreting operational tweaks – such as the recent widening of the BOJ’s tolerance band for the 10-year JGB yield and slower equity exchange traded fund purchases – as signals of policy shifts, or “stealth tapering”. The BOJ has been able to anchor bond yields with reduced purchases. Its yield curve control framework gives the BOJ some flexibility to alter the pace of the purchases by gradually widening the tolerance bands around the target instead of changing the yield target itself. The central bank, like its peers, has also found that asset purchases are more effective during periods of market instability – allowing it to keep powder dry during normal market functioning.

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Elga Bartsch
Head of Macro Research
Read bio
Nicholas Fawcett
Macro Research

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