The yen has strengthened against the Swiss franc since the end of October as Japan’s inflation continued to run above the 2% target. PM Ishiba won a run-off vote in parliament to stay on, adding to its gains.

Ishiba said last week that he will ask companies to implement significant wage hikes at next year's labour negotiations, as his government puts pay rises at the top of its public policy priorities.

He pledged to achieve his policy goal of raising the average minimum wage by 42% by the end of the decade. But economists largely deem it unrealistic given small firms’ affordability.

Lately BOJ Governor Kazuo Ueda said the economy was progressing towards sustained wages-driven inflation, leaving open the chance of another rate hike as early as next month.

The central bank will tighten again at its December meeting as a strengthening economy and concerns over the depreciating yen prompt policymakers to act, according to economists in a Reuters poll.

Japan's GDP expanded an annualised 0.9% last quarter, slowing from the previous three months on tepid capital spending though an unexpected pickup in consumption was a bright spot.

That being said, political risks may delay policy path as threats of higher tariffs by Washington cloud the outlook for the economy. Japanese are still haunted by the Plaza Accord that caused Lost Decades.

Readiness for shocks

The Biden administration reached a deal with Japan in 2022 that lift a portion of the additional 25% tariff imposed on steel imports under Trump in 2018 and transformed it into a so-called tariff-rate quota.

Trump may impose tariffs on Japanese cars exported to the US, Stefan Angrick, a senior economist at Moody's Analytics, said in a recent interview. The products accounts for a good share of the exports.

He predicted that possible tariff hikes would be limited though if Japanese carmakers promise to expand investment and shift production to the US. Japan is now the world's largest investor in the US.

Japan's exports expanded faster than expected in October, led by a pick-up in chip equipment demand in China. Manufacturers were less confident about business conditions last month, a Reuters poll showed.

Confidence in the service sector also eased for the fifth consecutive month to its lowest since February 2023. The IIMF recently flagged risks to Asia's economy including China’s fragile housing market.

Japanese household spending fell in September for the second straight month when the world’s fourth-largest economy relies more heavily on consumption to accelerate recovery.

The number of bankruptcies due to lack of employees increased 1.8-fold in the April-September period from a year earlier, according to Tokyo Shoko Research, highlighting the significant impact on business from surging wages.

Widening yield spreads

Around 20% of Swiss exports of goods go to the US, customs data shows, making the country a more important market for Switzerland than Germany, China or France.

Economists have estimated that Swiss economic output could be reduced by 1% if severe amplification effects like a trade war broke out or companies started relocating to avoid rising costs.

The Swiss pharmaceutical industry, manufacturers of machinery, appliances, precision instruments, watches and foodstuffs, for example, would suffer significantly from higher tariffs, the ETH university warned.

The US plays a similar role as Japan’s export destination. However, exports account for over 70% of the Swiss economy, while their contribution to Japan is far outweighed by consumption.

Notably, Japanese government bonds enjoy higher yields than their Swiss peers. The yield spreads have been widening with monetary policy divergence that takes place this year.

Swiss inflation rate rose 0.7% last month, close to its lowest level in more than three years. The reading has undershot consensus for four months in a row.

The current weakness in German industry is sapping demand in local manufacturing sector, SNB Chairman Martin Schlegel said on Saturday. Markets give a 72% probability for a 25-bp rate cut for its next meeting.

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