The slowest economic growth in two years and the strongest yen in 15 months highlight Japan’s ongoing struggle to revive inflation even as prices elsewhere in the developed world begin to inch higher.
Japan’s economy grew at an annualized rate of 0.5% in the three months ending December, capping an eighth straight quarterly expansion which is the longest stretch in nearly 30 years. But it was a decline from more than 2% in each of the previous two quarters, and with the yen’s surge set to lower import prices, the Bank of Japan looks to have an even tougher job hitting its 2% inflation target.
Meanwhile, a slower expansion and a stronger currency will reduce market speculation that policy normalization could be headed Japan’s way.
The yen’s renewed strength won’t immediately affect economic growth or corporate activity, but could take the air out of inflationary pressures, said Junko Nishioka, chief economist at Sumitomo Mitsui Banking Corp. “The fact that this might prolong the BOJ’s easing period is far more serious,” said Nishioka, who is a former BOJ official.
Strong growth in recent quarters, steadily rising inflation and surging global bond yields had fueled speculation that the BOJ would soon follow its global peers in turning toward policy normalization, perhaps by letting its yield target rise. Nearly half of economists surveyed by Bloomberg said they expected the BOJ to take its first step toward normalization this year.
For many years, Japanese stocks moved in contrast with the yen. When the currency weakened, they tended to rise.