Japan: the rebound is sustainable

published 31 October 2005

After numerous false starts, Japan finally seems to have embarked on a sustainable rebound path, says Handelsblatt. Economic growth reached 5.6% in the first quarter amid strong domestic consumption; non-performing loans on banks' books have fallen; and corporate profitability has jumped following general corporate restructuring. Better still, the bond market appears increasingly confident that "the worst really is over", says The Economist. The yield on ten-year government bonds has hit 1.9%, up from 1.45% only a month ago and three times higher than last June's 0.43% (the lowest yield ever recorded for government debt). The "ultra-low yields" have long reflected the authorities' apparent inability to deal with deflation, so their rise therefore rather suggests that investors think deflation is finally on the way out. Indeed, prices of corporate goods (those traded among corporations) have already begun to climb. Climbing yields could also be foreshadowing a rebound in bank lending, "the only measure of economic activity still declining" in Japan. According to some, bond prices are falling (and hence yields rising) because they have cut back on their long-term bond purchases. Instead, they are hanging on to cash because they expect to be lending more out soon.