Japan Economy 2Q19: A weaker-than-expected growth outlook

Japan's recovery has been nothing to shout about
Chief Investment Office03 May 2019
Photo credit: AFP Photo

The Japanese economy has emerged from the natural disasters last autumn, but the recovery was nothing to shout about. Preliminary real GDP growth turned positive to 1.4% (q/q saar) in 4Q18 but this was not enough to offset the decline of 2.6% in 3Q18. We trim our 2019 GDP growth forecast to 0.7% from 1.0%.

Until recently, the 2019 growth outlook debate has centred on the consumption-tax hike scheduled for October. The tax increase will dampen domestic demand less this time, partly because government policies are more supportive. The cabinet has approved a record JPY101.5t budget for FY19, a 3.8% increase compared to last year and the biggest rise since 2011. The budget specifically allocated JPY2t in spending to counter the impact of the consumption-tax hike.

The motivation for policy support should be strong this year. Prime Minister Shinzo Abe’s Liberal Democratic Party intends to tout the success of Abenomics in delivering Japan’s longest post-war recovery ahead of the upper house elections in July. The imperial transition in April and the G-20 Osaka summit in June will also put Japan in the international spotlight this year.

The downside growth risks from external sources are new and have not been fully priced in. The global economic slowdown and faltering electronics demand have started to weigh on Japan’s exports. Manufacturing PMI fell to 50.3 in January, sharply down from 52-54 in the past 12 months, and the lowest seen since August 2016.

There are additional headwinds from US-China trade disputes and potential automobile tariffs considered by the Trump administration. These could offset the tailwinds from Japan’s further trade liberalisation, such as the implementation of CPTPP and Japan-EU EPA.

Recent reports on the government’s statistical errors have complicated the picture. The labour ministry was found to have surveyed only a third of the country’s large companies during 2004-17 before correcting its methodology in 2018, which resulted in an artificial jump in wage growth last year. The whole trajectory of wage data needs to be reviewed to get a clearer picture about the state of economic recovery and the effects of Abenomics.

A weaker-than-expected growth outlook will likely hinder the BOJ from normalising monetary policy. At the January meeting, the BOJ slashed its FY18 GDP growth and FY19 inflation forecasts. The 10-year government bond yield has, since end-December, fallen back to the mid-point of the official target band (-0.2% to 0.2%). Our view remains unchanged for the BOJ to maintain this year’s short- and long-term interest-rate targets at -0.1% and 0%, respectively.

Click here to read the full Global Macroeconomics report.

Click here to watch our 2Q19 outlook video.

Click here for the latest CIO Insights publication.


This information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only.  This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank. 

This publication is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to you to subscribe to or to enter into any transaction as described, nor is it calculated to invite or permit the making of offers to the public to subscribe to or enter into any transaction for cash or other consideration and should not be viewed as such.

The information herein may be incomplete or condensed and it may not include a number of terms and provisions nor does it identify or define all or any of the risks associated to any actual transaction. Any terms, conditions and opinions contained herein may have been obtained from various sources and neither DBS nor any of their respective directors or employees (collectively the “DBS Group”) make any warranty, expressed or implied, as to its accuracy or completeness and thus assume no responsibility of it. The information herein may be subject to further revision, verification and updating and DBS Group undertakes no responsibility thereof.

All figures and amounts stated are for illustration purposes only and shall not bind DBS Group. This publication does not have regard to the specific investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction to purchase any product mentioned in this publication, you should take steps to ensure that you understand the transaction and has made an independent assessment of the appropriateness of the transaction in light of your own objectives and circumstances. In particular, you should read all the relevant documentation pertaining to the product and may wish to seek advice from a financial or other professional adviser or make such independent investigations as you consider necessary or appropriate for such purposes. If you choose not to do so, you should consider carefully whether any product mentioned in this publication is suitable for you.  DBS Group does not act as an adviser and assumes no fiduciary responsibility or liability for any consequences, financial or otherwise, arising from any arrangement or entrance into any transaction in reliance on the information contained herein.  In order to build your own independent analysis of any transaction and its consequences, you should consult your own independent financial, accounting, tax, legal or other competent professional advisors as you deem appropriate to ensure that any assessment you make is suitable for you in light of your own financial, accounting, tax, and legal constraints and objectives without relying in any way on DBS Group or any position which DBS Group might have expressed in this document or orally to you in the discussion.

If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of the Information, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.

This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Singapore: This publication is distributed by DBS Bank Ltd (Company Regn. No. 196800306E) ("DBS") which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore (the "MAS").