Nominal Growth Fuels Pressure for BoJ Rate Hike

Commerzbank's Volkmar Baur believes solid nominal growth and higher-than-expected inflation will keep pressure on the Bank of Japan (BoJ) to raise rates as early as September or October. The Japanese economy grew by 0.3% in real terms in the second quarter, but this was slower than expected. However, in nominal terms, the economy expanded by 1.2%, which is a more positive sign.

The higher inflation rate will likely keep the BoJ on track to raise interest rates again, supporting the Japanese yen (JPY). Baur also notes that Japan's fiscal problems and high debt levels are not as severe as often reported, with the country having one of the lowest budget deficits among G10 countries.

Despite market caution following recent interventions, Commerzbank sees fundamental improvements in the Japanese economy pointing to a slightly stronger JPY. Rising yields on Japanese government bonds have made market participants nervous, but higher tax revenues from nominal growth should lead to an improved fiscal situation.