Latest data driving Japan’s economic recovery

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Japan’s economy and recent statistics

Japan’s economy is the third largest by nominal GDP levels while fourth largest by purchasing power parity. Recently, the country reported its first quarter growth with GDP rising 1.7% on an annualized basis supported by a downward revision on the previous quarter and an extra leap year day in February that pushed consumer spending (+0.5%) and government demand (+0.7%). However, these levels do not indicate a good news based on economists due to weak fiscal policy (a rise in sales tax) and also decreased political imperative for a big stimulus package. Japan’s economy which has a small sized energy sector has the least exposure to fluctuating oil prices.

 

The economy indicates softness but the performance was better than that expected in April. However, there are signs that Prime Minister Shinzo Abe may delay a 2017 tax hike in order to be on a recovery track. The latest data of April showed factory output falling 3.5% against prior corresponding year while consumer spending fell 0.4%. There was however improvement from the month before. There was a 0.7% rise in income and 0.3% rise in industrial output from the month before. Unemployment remained flat at 3.2%. The data was better than expected and led to a rebound in the yen.

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Consumer Prices (Source: Bank of Japan)

 

Stimulus package

Mr. Abe is thinking of a fiscal stimulus package by end of 2016. Recently, Etsuro Honda, a close adviser, called for a ¥10 trillion ($91 billion) spending package. He said Abenomics had reached a new phase in which monetary policy would carry a lesser burden. Given the challenging conditions like China economy slowdown, renewed strength in the yen, and impact of big earthquakes in southern Japan in April, Japan’s economy growth is likely to be stagnant in the second quarter.

The reason for an economic stimulus is driven by weakening economic data in the past few months and growth contractions in the previous quarters. Policy makers under Japan’s Prime Minister Shinzo Abe have tried persuading consumers and businesses to increase spending levels through infusing cash into the economy via central bank asset purchases, stronger public spending and other strategies. However, this did not work consistently and an early rise in sales tax pushed the plan off track pushing the economy into weakness.

Political viewpoint

In December 2012, when Mr. Abe was elected in conservative coalition, the Japanese economy has recorded growth expansion in eight quarters while in five quarters it was narrowed down. The minister’s Abenomics is supported by very few voters. An election in the upper house of Parliament in July is adding to the pressure to turn things around. Mr. Abe is looking at ways to restore momentum with some of the options including – drafting a supplementary stimulus budget and considering to delay an increase in the national sales tax.


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Factors of concern

  • Currency appreciation– Despite low interest rates, the yen in 2016 has appreciated by more than 10% from more than 120 at the end of 2015. With the rising yen, the value of overseas sales has reduced thereby making goods more expensive in overseas markets. A strengthening yen indicates that multinational companies are forced to revise down their earnings forecasts. However, Japanese policymakers have been struggling to keep the currency from strengthening and deflation from re-emerging.
  • Shift in working demographics – According to the Ministry of Health, Labor and Welfare, Japan’s population is declining by a million people every year and disposable personal income is stagnant. Meanwhile, most of them are retiring, working age are worried about risks of outliving their retirement savings, future cuts to benefits. This is driving them to reduce spending and expand savings. On the other hand, in order to soften the economic impact more women are encouraged to join the workforce. In the past five years, rise in women has more than offset the decline in male workers which has stabilized the number of Japanese workers and supported household incomes. Currently, 66% of the women participate in the labor force.

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Labor Market Conditions (Source: Bank of Japan)

 


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Outlook

According to the Bank of Japan’s Governor, the expected growth rates are foreseen in the range of 1% to 1.5% for fiscal 2016, slightly positive for fiscal 2017, and about 1% for fiscal 2018. In March, combined production from Japan’s mines, manufacturers, and utilities surged 3.8% on a month-over-month basis compared to a 5.2% fall in February indicating that the economy may be back on track. The bank’s governor believes that it will reach its 2% inflation goal during fiscal 2017 thereby indicating that the government will undertake additional easing measures if necessary. Meanwhile, CPI is seen at 0.5% in fiscal 2016, 1.7% and 1.9% in 2017 and 2018, respectively.

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US Dollar/Japanese Yen FX Spot Rate (Source: Thomson Reuters)

The latest data suggests that Japan seem to have averted the recession by a margin in the first three months of 2016 and the current quarter gives an indication of a slight rebound.


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