Economic developments and forecasts

These are the Key Macro Events for the upcoming week.

We expect drags from US tariffs to keep a lid on Japanese growth. Trade talks with the US are taking quite some time. The Bank of Japan (BoJ) recently lowered its inflation forecasts, but upside risks remain. We expect the BoJ to stay on a cautious, gradual hiking path. In its June meeting, the BoJ announced to slow its pace of tapering, as expected. High public debt and rising rates pose challenges, but there are risk-mitigating factors. Meanwhile, the Japanese government bond curve has steepened due to a higher term premium. We do not have indications for structural US debt outflows by Japanese investors, yet. We expect the yen to appreciate versus the US dollar in 2025-2026.

NATO leaders today voted to officially raise the alliance’s defence spending target to 5% of GDP from 2% previously, comprised of 3.5% in core defence spending (the figure directly comparable to the previous 2% target) and 1.5% in infrastructure related to defence. With many countries likely to have already met the latter target, the really important number is the 3.5%, and it is here where there are major doubts over both the willingness but also the capability of meeting this target. Spain has a vague exemption from the target, while other countries openly doubted the target in the run up to the Summit.