Backdrop improves in Japan… but uncertainties remain


Although the Bank of Japan (BoJ) believes that Japan’s economic growth is likely to continue to expand “at a pace above its potential”, the central bank left its monetary policy stance unchanged during April. Most BoJ policymakers appear reluctant to make any changes until the country’s rate of inflation achieves its target of 2%. BoJ officials believe that inflation is likely to keep moving towards 2%, but momentum is “not yet sufficiently firm”.
The BoJ upgraded its economic growth forecast for the current fiscal year (ending in March 2018) from 1.5% to 1.6%, but cut its forecast for inflation from 1.5% to 1.4%. Japan’s rate of unemployment remained unchanged at 2.8% during March, but lacklustre wage growth and weak consumer spending meant that core inflation rose by only 0.2% year on year during March.
The BoJ’s most recent Tankan survey of business sentiment found that business conditions for larger manufacturers had improved during the first quarter of 2017, underpinned by a more supportive environment for exporters caused by the yen’s weakness. Conditions for medium-sized and smaller firms also appeared to improve. Nevertheless, larger Japanese companies expect the backdrop to deteriorate over the next quarter amid uncertainties surrounding Brexit in Europe and President Trump’s policies in the US.
The Nikkei 225 Index rose by 1.5% in April, while the broader-based Topix Index climbed by 1.3%. Medium-sized Japanese companies fared poorly in comparison: the TSE Second Section Index fell by 4.1% over the month. Concerns over the future of troubled technology company and Nikkei 225 Index constituent Toshiba intensified; the firm finally released its much-delayed earnings results, but warned that “material events and conditions… raise substantial doubt about the Company’s ability to continue as a going concern”. Toshiba’s results were not signed off by its auditors, PwC Aarata.
Policymakers at the Reserve Bank of Australia (RBA) maintained the central bank’s key interest rate at 1.5% at their April monetary policy meeting. The decision had been widely anticipated; RBA Governor Philip Lowe warned that conditions in the labour market had weakened, and wage growth remained soft. On a more positive note, tighter lending conditions recently imposed by the Australian Prudential Regulatory Authority (APRA) are expected to alleviate risks associated with high levels of household borrowing, particularly with regard to interest-only mortgage loans. The ASX All Ordinaries Index rose by 0.7% during April.

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