economy in coming quarters, following a prospective decline in the second quarter.
Surging energy prices and the slowdown in major trading partners’ economies will likely
cap economic activity. However, a recession appears unlikely given accommodative
financial conditions and slower but continued growth in exports.
Most key demand components probably will be soft in coming quarters. Export growth
is likely to pull back as the economic slowdown spreads from the
regions including emerging
some offset. Business investment will likely also remain tepid as corporate profits suffer
from elevated energy prices and the global slowdown. Higher energy and food prices
will also likely hit private consumption by siphoning off consumers’ purchasing power.
Residential investment also should slow this quarter as recent declines in housing
affordability in the wake of higher real property prices cap housing demand.
Core inflation (excluding fresh food) will likely exceed the 2% mark this summer,
driven by higher energy and manufactured food prices. However, renewed weakness in
consumer spending would exert disinflationary pressures on items away from food and
energy. Thus, we expect that underlying inflation will probably remain low in 2008 and
2009. Core inflation will probably edge down to around 1% again in late 2009, as
positive contributions from manufactured food and energy taper off.
We expect the Bank of Japan (BoJ) to leave policy rates unchanged at 0.5% through
2009. The BoJ is monitoring growth risks stemming from rising oil prices closely.Japan
Unlike the ECB and the Fed, the BoJ has not shifted its focus to upside inflation risks.
We expect ten-year JGB yields to edge down gradually, as economic growth remains
below trend and market expectations for a BoJ rate hike recedes further.