Japan: Homegrown woes?

For its part, the Japanese yen has depreciated about 4.25 percent against the renminbi (and the U.S. dollar) this year.

The consensus among investment banks polled by The Economist puts Japan’s growth at slightly more than 1 percent this year. First-quarter growth was 1.3 percent on a quarter-over quarter basis around twice the consensus estimate. However, the yen and the Nikkei sold off on the news because a good part of that growth reflected a decline in prices. Japan’s GDP deflator stood at -1.2 percent, which means nominal growth was practically flat and Japan’s economy remains in the grips of deflation.

Japan is unlikely to benefit from a small appreciation of the renminbi. It is probably not an exaggeration to say Japan’s problems are largely homegrown. In the second half of the year, the Bank of Japan is likely to adjust its money market operations, as it has been providing more liquidity than the Japanese banks want. Although some observers may be tempted to call this a tightening, overnight rates will probably stay close to zero.