Yasuko Koido 
Abrupt yen appreciations have been associated with, or preludes to, global financial instability. So far, the recent yen surge has had only moderate spillovers to global financial markets, which should not have significant macroeconomic effects. But the episode is not necessarily over and the possibility of further yen gains is a distinct risk.
We estimate that Japan’s nominal neutral interest rate – the rate consistent with monetary policy that is neither stimulative nor restrictive – has risen somewhat since 2022, marking a striking reversal from its decades-long slide. More importantly, we project it to continue rising gradually, to around 1% by 2030 from 0% in 2023.
At Wednesday’s policy meeting, the Bank of Japan (BoJ) raised the policy rate to 0.25% without clear evidence of wage-driven inflation in wage and consumption data. Although CPI has stayed above 2%, the core-core CPI (excluding energy and fresh foods) has been easing.
At the July policy meeting, the Bank of Japan (BoJ) will reveal its plan for reducing JGB purchases over the next one to two years. We project that the BoJ will reduce monthly JGB purchases by ¥0.5trn every quarter, from the current ¥6trn, to impress a “sizeable reduction” on the market, while avoiding a sharp rise in yields by stressing flexibility and predictability.
Private consumption growth in the Philippines has slowed to its lowest rate since 2010 outside the pandemic period. The main culprit is worsening confidence, which has been hit particularly hard by persistent inflation. Although inflation should subside later in the year, the impact on consumer sentiment will take time to feed through, so we don’t expect a substantial boost in spending this year.
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Some market participants are raising concerns over a fall in demand for US Treasuries from Japanese investors amid higher domestic yields. But we think that there will continue to be a large and stable investor base in Japan for US Treasuries due to the still-large yield gap. Also, uncertainty over the Bank of Japan’s monetary policy is dissuading investors from increasing their holdings of Japanese government bonds.
We think the EU-China economic relationship will experience more friction in the future due to structural changes to China’s economy, EU fears about Chinese goods imports undercutting European industry, and national security concerns. However, the EU and China will continue to display high levels of interdependence, providing a strong incentive to avoid major disruptions.
Total construction work done is forecast to expand 8.8% in 2024 after falling 0.1% last year. Demand for construction came in lower than expected in late 2023, weighed down by uncertainty around global growth, still heightened interest rates, and weakened business confidence. Construction activity this year will be boosted by falling interest rates, with the Bank of Korea expected to begin rate cuts in Q2 as inflation falls towards the target of 2%. We expect work done to climb an average 1.8% p.a. over the four years to 2028.
We forecast total construction work done to accelerate 4.8% in 2024. Civil engineering construction and non-residential building will drive the near term while residential building will continue to weigh on growth. Robust future capex plans will support construction activity. However, business investment has remained on a downtrend with the realisation of capex plans slow. There remains a downside risk to our forecast should expenditure plans remain slow. Nonetheless, inflation pressures are set to ease throughout 2024 and provide a boost to activity
