Subdued outlook for inflation

January 2019

The outlook for Japan’s key export market appears clouded, dampened by the ongoing trade conflict between the US and China. Exports fell at an annualised rate of 3.9% in December, curbed by slower demand from Asia. Meanwhile, the Japanese yen rose to its highest level against the US dollar since April 2018 during January.

  • The Bank of Japan cut its inflation forecast
  • Japan’s retail sales were better than expected in December
  • South Korea’s economic growth picked up in Q4 2018

To view the series of market updates through January, click here.


The outlook for Japan’s key export market appears clouded, dampened by the ongoing trade conflict between the US and China. Exports fell at an annualised rate of 3.9% in December, curbed by slower demand from Asia. Meanwhile, the Japanese yen rose to its highest level against the US dollar since April 2018 during January. Investors tend to regard the Japanese yen as a safe haven during periods of financial instability.

 

“Shinzo Abe pledged to “deepen” the strategic partnership between Japan and the UK following Brexit”

 

On a visit to the UK, Japanese Prime Minister Shinzo Abe pledged to “deepen” the strategic partnership between Japan and the UK following Brexit. He urged the UK Government to do its utmost to avoid a no-deal Brexit and emphasised the need to maintain “legal stability” for businesses that have invested in the UK.

Over the fiscal year 2019, Japan’s government expects the country’s economy to grow by 1.3%, while inflation is forecast to grow by 1.1%. However, inflation remains subdued: annualised core consumer price inflation slowed to a rate of 0.7%, well below the Bank of Japan’s (BoJ’s) target rate of 2%. The BoJ maintained its monetary policy stance in January, but cut its inflation forecast for 2019 from 1.4% to 0.9%, citing the impact of lower energy prices.

Retail sales were stronger than anticipated in December, rising at an annualised rate of 1.3%. Activity was boosted by stronger demand for clothing and home appliances. An increase in consumption tax is scheduled to take effect in October this year.

During January, the benchmark Nikkei 225 Index rose by 3.8%, while the broader-based Topix Index climbed by 4.9%. In comparison, the TSE Second Section Index rose by 7.1% – which represents medium-sized Japanese companies that tend to be more exposed to the domestic economy – rose by 8% over the month.

Economic growth in South Korea picked up during the fourth quarter of 2018 as government spending helped to offset a slowdown in exports. The country’s economy expanded at an annualised rate of 3.1% over the final three months of the year, compared with third-quarter growth of 2%. However, the economy grew by only 2.7% during 2018 as a whole, having expanded by 3.1% in 2017. Elsewhere, Samsung Electronics, which makes up around 27% of South Korea’s market, issued a profit warning against a backdrop of rising competition and weaker demand for chips. The Kospi Index rose by 8% over January.

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