RAM Ratings: Japan signals possible future rate cuts, slashes inflation forecast amid heightened downside risks

Published on 01 Nov 2019.

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RAM Ratings notes a stronger possibility of future easing by the Bank of Japan (BOJ), even though it kept its monetary policy steady yesterday. “Amid increasing downside risks from both the domestic and external fronts, there should be closer scrutiny of the momentum in attempts to achieve the BOJ’s price stability target of 2%,” observes Esther Lai, head of Sovereign Ratings. Japan’s economy is forecasted to expand 0.6% in 2019 and 0.7% next year, a downward revision from the policy members’ earlier estimates of a respective 0.7% and 0.9% in July. Average GDP growth clocked in at 0.9% in 1H 2019, within a potential range of 0.5%–1.0%.

In the lead-up to the October consumption tax hike (from 8% to 10%), Japan’s consumer confidence index had dropped to its lowest level in more than eight years. However, it edged up in October as various government measures have helped ease the burden of higher costs – albeit insufficient to sustain the long-term growth of private demand. While retail sales jumped 9.1% y-o-y in September, boosted by household durable goods, pre-tax spending was lower than before the last tax hike in 2014. Assuming the rise in consumption tax is fully manifested through the prices of taxable items, a 0.7% inflation rate (excluding fresh food) is expected in fiscal 2019, i.e. lower than the BOJ’s earlier forecast of 1.0%.

Heightened trade tensions and uncertain global policies have negatively affected business confidence and export performance in Japan. According to the latest Tankan survey by the BOJ, business sentiment among large Japanese manufacturers worsened for the fifth straight quarter to the lowest level since 2016. Overseas machinery orders and the industrial production index for electronic parts and devices have been contracting since the beginning of this year. 

With the conclusion of the US-Japan limited trade deal, Japan will reduce its import tariffs on certain American farm produce in return for lower US levies on a host of Japanese industrial goods. There is as yet no resolution to the existing 2.5% or potential addition of 25% to import taxes on cars and auto parts from Japan. As Japan exports 33% of its automobiles and parts to the US, any change in auto tariffs could adversely affect Japanese car manufacturers. 

Meanwhile, the Japan-South Korean trade dispute and disagreement over historical treaties has not significantly dented Japan’s merchandise trade because its exports to South Korea are relatively small, at only 7% of Japan’s total exports. On the other hand, the number of South Korean tourists – who used to account for almost a quarter of Japan’s overall tourist arrivals – have halved in recent months. Trade between these two economies is less convenient now that both countries have crossed each other off their lists of preferred trading partners, and there is no sign of any abatement.   

Japan is currently rated gA1(pi)/Stable and seaAAA(pi)/Stable by RAM on the global and ASEAN scales, respectively. The ratings reflect the country’s moderate growth, robust external finances and solid institutional framework. Despite heightening external risks stemming from protectionist trade policies, Japan’s sturdy external position is a key rating strength, backed by considerable reserves and healthy inflows of primary income. That said, these strengths are mitigated by a hefty public debt load, narrow policy space and a significant need for social security reforms. 


Analytical contact
Lynette Lee
(603) 3385 2621

Media contact
Padthma Subbiah
(603) 3385 2577


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Ratings on Japan