In an uncertain world, Japan remains safe haven

If it seems like rising global unrest is unavoidable, you might take comfort in the stability offered by Japan, despite the yen’s weakness against the U.S. dollar.

Read: Here’s what global experts are worried about

Increasing expectations for U.S. inflation help the U.S. dollar appreciate against other major currencies, say Royce Mendes and Andrew Grantham of CIBC Capital Markets in an industry report.

For the yen, wider U.S.-Japan yield spreads will keep weakness in place through 2017, says Tuuli McCully, senior economist at Scotiabank, in an economics briefing. However, that weakness is balanced by strengths.

Though Japan has gross public debt of about 254% of GDP in 2017-18, it can easily refinance that debt at low rates due to strong domestic demand for government bonds given Japan’s high savings rate. Further, the country has a current account surplus, which should remain about 3.67% of GDP through 2018.

The Japanese banking system is sound, with good capitalization and high asset quality, says McCully. Outstanding bank lending grew 2.5% year-over-year in January.

Read: Be cautious on international bond risk

Growth and inflation

McCully expects Japanese growth of 0.9% year-over-year on average through 2018, thanks to stimulative fiscal and monetary policies.

The latter is expected to remain unchanged, with accommodative policies in place until Japan surpasses 2% year-over-year inflation. Given the country’s subdued wage growth, McCully expects inflation of only 1.1% by the end of 2018.

Higher corporate profits should support business investment, and exports are showing signs of recovery.

While fiscal measures and a tight labour market support consumer spending, a shrinking population dampens long-term household consumption.

Read the full Scotiabank briefing here.

Also read: Were they right? Geopolitical fears derail market call

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.