The Japanese Economy is bouncing back, but rates will stay low.
The Bank Of Japan (BoJ) left rates unchanged last week and will stick with their asset purchase program. The BoJ also extended support for financial institutions in disaster areas by another six months. The economy has stabilized since the earthquake: Q2 real GDP growth (-0.5% QoQ) was an improvement on Q1 (-0.9% QoQ) and consumer prices are only mildly deflationary (-0.2% YoY).
Unemployment drifted down progressively this year from 4.9% to 4.3%, industrial production is now positive (0.6% YoY August) and the Tanken Business Conditions Survey rebounded. Although Japan in on the mend, the economy will soon return to its previous sluggish trajectory. Given the weak global economic environment we expect Japanese bond yields to remain low. JGBs tend to outperform the global benchmark during economic expansions when global rates rise. With developed market policy rates on hold for the foreseeable future, remain at most neutral JGBs within a global hedged bond portfolio.