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Also featuring commentary from Global Economic Weekly

September 24, 2023

Candace Browning, Head of BofA Global Research

It’s a small world after all. This week we discuss similarities/differences between China and Japan.


Many investors worry that China’s sluggish GDP (Gross Domestic Product) growth and weak inflation suggest it’s on the verge of Japan-style stagnation, with structural headwinds similar to what Japan faced in the 1990s.


Demographics are challenging and population declined last year. Additionally, China’s debt-to-GDP ratio of nearly 300% is close to Japan’s level in the 1990s. Besides that, China’s housing market is nearly saturated as 96% of urban households already own at least one house or apartment. However, there are important differences too. The risk of a Japan-like currency appreciation shock is quite low. Also, China hasn’t built up massive asset pricing surges like we saw in Japan, when commercial land prices rose 300% between 1985 and 1991. Chief Economist for Greater China and Head of Asia Economics Research Helen Qiao believes China can avoid ‘Japanification’ if policymakers take measures to reverse the growth downtrend. Simply unwinding existing restrictions can cap the downside in housing. On the other hand, falling into long term stagnation at China’s current income level would be an even drearier scenario than what Japan experienced.

Featuring Commentary from Global Economics Weekly

Claudio Irigoyen, Head of Global Economics, BofA Global Research

Hawks are in the air


This week, the Fed stayed on hold at its September meeting, keeping the policy rate at 5.25-5.50%, as expected. Importantly, the forward guidance language was not altered. It still refers to "the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time", leaving the door open for additional hikes without making a firm commitment to raise rates further.


Meanwhile, the revised "dot plot" was hawkish and the price action reflected the hawkish surprise. The Fed is projecting one more hike in 2023, for a terminal rate of 5.5-5.75%. We have argued that it makes sense to leave the last hike in the dot plot for the sake of optionality, even if the Fed does not ultimately deliver that hike. The median dot for 2024 moved up by 50bp (basis points) to 5.125%, indicating just two cuts next year. This was the biggest surprise for the market.


The FOMC’s (Federal Open Market Committee) policy rate projections were broadly in line with our expectations and leave our Fed call unchanged: we expect one final hike in November, but it is now a close call due to the length of a potential government shutdown. If a shutdown were to last for a month, it would deprive the Fed of an important set of data for the decision-making process.

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