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• Although the Japanese economy marked in Q4 2011 the fourth GDP contraction in five quarters, recent economic data suggest that economic conditions are slowly improving.
• In our view, Japan should avoid a technical recession, with reconstruction-related activity and inventory restocking offsetting any further weakness in net trade. • The risk of a slowdown may appear again in FY2013, when reconstruction demand would have run its course and tax hikes would have to take effect in order to finance the increased government consumption and investment.
• The Bank of Japan surprised markets at its February policy meeting with a decision to increase long-term JGB purchases and turn its “understanding” of medium/long-term price stability into an inflation target of 1%.