The yen dropped to its three-week low this week, after the Fed indicated it was in no rush to cut interest rates. Japan’s GDP growth in Q4 was revised lower to an annualised pace of 2.2%.

Exports and business spending led the expansion, so the economy will be more vulnerable to Trump’s tariffs policy. Exports rose for a fifth straight month in February, possibly helped by stockpiling.

The US accounts for 21 trillion yen worth of them with automobiles representing roughly 28% of that. Some Japanese companies rushed to increase inventory in the country as a buffer to the shock.

A slowdown in spending by households may prompt the central bank to be more cautious as it looks for opportunities to keep dialling back easy monetary settings with gradual rate hikes.

Data from the CFTC on Friday showed that speculators turned net bearish on the US dollar last week for the first time since October, though the position is close to neutral.

The dollar has been under pressure for most of this year as the assumptions that Trump would quickly usher in pro-growth policies transformed into worries about the impact of trade levies.

Atlanta Fed President Raphael Bostic said he anticipates the Fed to cut only 25 bps by the end of this year. New York Fed President John Williams said policy is in the right place given economic uncertainties.

Curse of deflation

The BOJ kept interest rates steady last week and warned of heightening global economic uncertainty, suggesting the timing of further rate hikes will depend largely on the fallout from potentially higher tariffs.

But Governor Kazuo Ueda also said rising food costs and stronger-than-expected wage growth could push up underlying inflation, highlighting attention to mounting domestic price pressures.

According to preliminary figures released by the Japanese Trade Union Confederationn,760 companies where its unions are based, as of March 14, agreed on an average wage rise of 5.46%

The increase for 351 SMEs (with fewer than 300 employees) was over 5% - the first time since 1992. 

Apart from that, Japan’s workers saw their base pay rise at the fastest clip in 32 years in January.

However, real cash earnings fell 1.8%, the largest drop since March 2024, and deeper than economists’ forecast of a 1.6% retreat, which will likely lead to the push for gradual rate increases.

Core inflation hit 3% in February and an index stripping away the effect of fuel rose at the fastest pace in nearly a year. Households continued to face rising living costs, particularly soaring food prices.

Finance Minister Katsunobu Kato said in a recent interview that the government could only declare victory over deflation when it saw no prospect of sliding back despite positive signs of rising prices.

Tailwind from neighbour

Optimists see signals that Japanese corporate behaviour has finally turned a corner. Many companies are jettisoning non-core assets such as real estate portfolios, businesses that have no link with their main operations.

Bankruptcies are picking up; zombie companies are now more vulnerable to collapse. But analysts have celebrated the trend, citing improving productivity that could help jolt business out of the doldrums.

Takahide Kiuchi, an economist at the Nomura Research Institute, warns that it is premature to declare that Japan had truly normalised. He suspects headline inflation would go down if the yen rises significantly.

The top diplomats from Japan, China and South Korea met in Tokyo on Saturday, seeking common ground on East Asian security and economic issues amid escalating geopolitical turmoil.

China’s top diplomat renewed his country’s call for free trade and regional cooperation amid broader “changes and chaos,” marking closer ties between the countries brought on in part by Trump’s stick.

A spate of stimulus introduced by the Chinese government may also prove to be a tailwind for its neighbour. The initiative to vigorously boost consumption, if successful, will underpin Japan’s exports.

We maintain the view that the yen will continue to rise to its real value within this year based on continuous real wage decline in the country and China’s political and economic shift.  

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