Has China made Japan an Emerging Market?

by Michael J. Howell21. September 2017 13:56

As a global supplier of consumer goods, Japan has for decades enjoyed a strong Yen, high street deflation and a surging bond market. Now, re-constituted as predominantly an Asian regional supplier of intermediate goods, Japan faces different challenges and consequently deserves new policy and currency regimes. It may in future behave increasingly like a typical emerging market, choosing a more stable currency against a pan-Asian basket, but at the cost of more volatile domestic liquidity flows, particularly, when Chinese and pan-Asian liquidity are also expanding as now. These increased flows may be channelled initially into Japanese equities and latterly into outward capital flows. On top, upward pressure on Japanese interest rates from higher domestic liquidity will build, so forcing JGB yields higher and likely spilling over negatively into international bond markets. There is a growing risk to the 10-year JGB, which could suffer an upward yield spike from zero to around 30bp.


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