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.

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