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Chief economist update: Japan's third wave

More infections equals more monetary policy easing and more fiscal spending.

Like the Fed and the European Central Bank, the Bank of Japan (BOJ) also kept monetary policy unchanged - target rate at -0.1% and target for the 10-year Japanese government bond yield at around 0% -- at its October meeting.

"For the time being, the Bank will closely monitor the impact of the novel coronavirus (COVID-19) and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels," it said.

The BOJ downgraded its fiscal year 2020/21 GDP forecast to a contraction of 5.5% from (July's prediction for a 4.7% decline) but adjusted the following year's economic projection to growth of 3.6% from +3.3% forecast three months earlier.

The BOJ's October 29 decision would have been fairly acceptable at the time it made them because new cases of infections had been declining. Fast forward less than a fortnight later and the country has found itself in the midst of a third wave.

Japanese prime minister Yoshihide Suga, himself, noted surging new cases in Hokkaido, Kanagawa, Tokyo, Osaka and Aichi. While still hesitant to re-declare a state of emergency, Suga renewed calls for ministers to implement concrete measures to control the infection.

This comes only a few days after the prime minister directed his Cabinet to prepare another stimulus package to cushion the negative impact on the economy of the virus' resurgence.

Japan's economy minister Yasutoshi Nishimura announced that the package would be delivered as soon as possible and spending would be geared on measures "that will attract private investment".

It couldn't come soon enough. For despite rebounding from multi-year lows in recent months, the Markit/Nikkei PMI surveys show that private sector activity in the country remains in contraction - the composite and services PMI since February 2020 and the manufacturing PMI since April 2019.

The same goes for consumer confidence. While sentiment and consumer perception have improved, they remain below pre-COVID-19 levels.

Japan's domestic challenges are being compounded by the second wave in the US and in Europe via their impact on the Japanese yen exchange rate.

The resurgence of infections have already prompted both continents to re-impose restrictions and sparked safe-haven yen purchases.

The yen has appreciated to ¥105.00 per US$1 - up 6.8% from this year's low of ¥112.11 and by 4.4% from the start of 2020.

As well as eroding Japan's export competitiveness and becoming an extra  drag on growth, the higher yen would put downward pressure on Japan's already very low/negative inflation.

Read our full COVID-19 news coverage and analysis here.

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