Photographer: Noriko Hayashi/Bloomberg

Japan Has ‘Historic Moment’ to Reverse Lost Decades, Says Bank of America

  • Bank of America sees opportunity for Japan to grow next year
  • BOJ’s yield-curve targeting is ‘best news of 2016,’ BofA says

Japan may emerge from its lost decades next year, according to Bank of America Corp.

The world’s third-largest economy has a tight job market, easy fiscal policy, and a new monetary program to control domestic borrowing costs and stoke inflation, which has also helped insulate the nation’s bond market from rising global yields.

All together, this gives Japan the chance to emerge next year from two decades marked by deflation, falling incomes and declining productivity, Ethan Harris, Bank of America’s head of global economics, said in New York. 

"It’s the best news of 2016 from a global perspective," Harris said of the BOJ’s yield-curve targeting. By pegging the 10-year bond yield at zero percent, the bank is able to prevent a typical damping effect in the wake of a rising fiscal deficit, he said.

His call follows the predictions of many over the years that Japan’s latest policy program would finally shake its economy out of a pattern of expansion and contraction, with muted price gains or outright deflation. Prime Minister Shinzo Abe returned to power in 2012 with the intention of ending deflation and fueling economic growth through a program known as Abenomics. Yet his recipe of aggressive monetary easing, fiscal stimulus and structural reforms has yet to consistently achieve its goals.

Bank of America expects real GDP growth in Japan to reach 1.5 percent next year, above its euro area estimate of 1.4 percent and not too far off its 2 percent projection for U.S. expansion.

Yet others remain skeptical, arguing that an aging population is inhibiting Japan’s economy. Also, while there is hope that Donald Trump’s fiscal stimulus in the U.S. will in turn fuel global growth, those expectations may go unfulfilled, and the popularity of the yen as haven in times of risk could see it change direction again. The question also remains: Will Abe deliver further reform in key sectors like the labor market.

"The outlook is unfortunately not for accelerating growth on the horizon, as much as we’d like to see it," said Torsten Slok, chief international economist at Deutsche Bank AG in New York, who sees 1 percent growth in Japan next year. "The depreciation in the yen hasn’t been dramatic enough to justify that yet."

The dollar rose to 118.03 yen as of 3:08 p.m. Thursday in New York, furthering a weak streak in the yen since Trump’s victory when it was trading at 105. Deutsche Bank sees the dollar rising to 125 yen by end-2017, while Bank of America’s forecast is 120.

However, Harris, a former researcher at the Federal Reserve Bank of New York, points to the tightening Japanese labor market, where the unemployment rate continues to fall from its post-crisis peak and the job offers-to-applicant ratio has been steadily increasing. He notes the latter is a key indicator of the growth rate of new job offers, and historically has been correlated with rising wages as the ratio exceeds one. That threshold was crossed in 2013 and has been climbing since.

While Japan’s core consumer price gauge remains below zero, higher oil prices and the weaker yen point to a better outlook for inflation in 2017. The Japanese equity market has also perked up, with the Topix index up about 18 percent since Trump’s win.

"The deep pessimism about Japan is overdone," Harris said.