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Japan’s Economy: Monthly Outlook (April 2019)

Ascertaining the truth of China’s economic recovery / the last resort for the FRB as it faces imminent reverse yield

Shunsuke Kobayashi

Yota Hirono


◆In this report, we examine themes which are essential in predicting the rate and extent of Japan’s economic recovery, and the possibilities for growth. These are the recovery of China’s economy and the effects of reverse yield in the US.

◆Ascertaining the truth of China’s economic recovery (report on research trip): The writer of this report visited China just as the curtain rose on the National People’s Congress from March11 to March 15. The writer surveyed the situation in Beijing, Xiong'an New Area, and Qingdao, and exchanged opinions with local experts. In this report we share insights gained on this research trip. First of all, US-China trade friction was not a major factor in the loss of momentum in China’s economic growth in 2018. It would be more accurate to say that China was hit with tariff hikes right at a time when domestic demand was losing speed due to policy changes, thereby adding to a preexisting condition. The stalling of domestic demand can be attributed to the following: (1) strengthening of regulations regarding wealth management products, (2) putting the squeeze on infrastructure projects, (3) introduction of regulations regarding inter-individual consumer finance, and (4) suspension of tax reduction on automobile purchases. The first two items in this list have a political aspect, and once into the current year (2019) have been on the way to being relaxed somewhat. This has contributed to a turn toward recovery for the Chinese economy.

◆However, China’s domestic inventory level is high. Hence it will take time before China’s economic recovery begins to bring benefits to Japanese corporations. Meanwhile, factors (3) and (4) remain, so it is highly possible that recovery in consumption will be delayed. Therefore, it will take some time for Japanese corporations with a high dependence on Chinese consumption to recover. Possibilities are great that the pace of recovery will be relatively slow.

◆The last resort for the FRB as it faces imminent reverse yield: In late March the long-term interest rate on US Treasuries fell momentarily below the short-term rate (in other words reverse yield occurred). Directly related to this phenomenon was the FRB’s turning dovish, announcing that it would bring an early halt to its asset reduction policy. However, considering the business cycle, as well as the structural problems in the labor market where there is a negative history effect, it would seem rather difficult to sit back and expect a significant increase in the long-term interest rate to simply naturally occur for some time to come. If the yield curve continues extremely flat, the possibility that the credit expansion cycle could reverse increases, in which case a recession could occur.

◆Even with imminent reverse yield, the FRB will likely plan additional monetary tightening with the purpose of reigning in the debt leveraging activities of American corporations. However, due to the factors already mentioned above, it will be difficult to raise the policy interest rate for some time to come. And they have also abandoned quantitative policy. The only thing they have left is qualitative policy – that is, steepening the curve by shortening the maturity of the average term of its assets (US Treasuries). It is only for the time this mode of market adjustment is functioning that the reverse yield to recession scenario can be avoided.

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