Economic Brief

• The Japanese economy recorded a 0.6% quarterly expansion in March 2015, the fastest pace since June 2013. However, it contracted -1.4% over the year to March 2015 due to recessionary conditions in the June and September quarters of 2014, following the Consumption tax rise.
• Leading indicators such as machinery orders are pointing to an improved outlook. NAB Economics is forecasting a 0.8% increase in 2015, followed by an improved 1.3% in 2016.
• Unemployment has fallen to a low of 3.4%. However, real wages have continued to contract.
• Japan’s weak currency has benefited its Current account (which is expected to maintain a surplus) and led to a surge in the stock market.
• Japan’s stock of FX reserves and International Investment position reveal a very strong external position.
• Core Inflation (ex Consumption tax) rose a modest 0.2% over the year to March, 2015. The BOJ has committed to maintaining its ¥80 trillion of JGB purchase to boost activity and prices.
• There are concerns that BOJ is in effect monetizing the debt, and bond purchases may lose their efficacy over the next 2-3 years.
• Japanese banks are stable, well-capitalised and moderately profitable.
• Credit risks are contained; however, interest rate risks are significant. Further, there are funding gaps for Japanese banks with overseas operations.
• Japan’s substantial public debt stock (~246% of GDP) is the biggest concern facing the economy. If the public debt is not stabilized , there could be continual downward pressure on the Yen and higher interest rates. This would substantially raise Government debt servicing costs, cause massive capital losses among Japanese banks and potentially trigger a recession.

For further analysis download the full report.

Japanese Economic Update – May 2015   (PDF, 705KB)