Summary & Overview

• Gross Domestic Product (GDP) fell for the second consecutive time in the September quarter. While this is often considered to indicate a country is in recession, this is not a meaningful guide for a country like Japan whose population is falling. Other indicators, in particular for the labour market, but also business surveys, trade and consumption indicators do not indicate an economy in recession. Moreover, the decline in September quarter GDP was largely driven by an inventory correction and domestic demand was stronger.

• Labour market conditions remain tight with the unemployment rate at 3.4%; wage growth though remains restrained.

• Nevertheless, it is clear that the economy has struggled to regain any strong momentum post the increase in the VAT in 2014. This weakness is disappointing particularly in the light of the strong growth (by Japanese standards) in gross national income.

• Japanese corporations have enjoyed record profit growth, which has swelled their cash and deposit holdings. For the success of ‘Abenomics’ it is critical for businesses to boost wages and investment, thereby setting off a ‘virtuous circle’ of higher activity and prices. A concern has been that the high level of corporate profits has not translated into commensurate increases in investment. However, indicators point to some possible improvement in business investment in the near term.

• While exports of goods and services grew in the September quarter by 2.6% on the previous quarter, the annual growth rate has been decelerating, and total exports have actually declined over the last six months. The large depreciation of the Yen since late 2012 has provided a large boost to the competitiveness of the Japanese tradeables sector. However, several factors have acted to hold back export growth.

• Inflation remains modest, with the core (ex fresh food) CPI measure declining by -0.1% over the year to September. The Bank of Japan (BOJ) has pushed back its forecast for Japan achieving the 2% inflation target to the second half of fiscal 2016.

• There have been record tourist arrivals – particularly from China – which has improved the current account position in 2015. Besides, a high level of FX reserves and a strong net international investment position, suggests a very strong external situation

• The Yen has depreciated 16% over the year to November, 2015 against the greenback. However, there has been a recent surge in USD funding premiums, which will likely raise costs of Japanese banks and corporations with overseas operations.The BOJ maintained its policy stance at its most recent (November 19th meeting). The current low level of JGB yields will likely limit the effectiveness of further easing.There is a tension between the desire to use fiscal policy to support the economy and the need to improve the Government’s finances. Even though fiscal policy has turned into a headwind, the government is struggling to meet its fiscal targets.

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Japanese Economic Update – November 2015   (PDF, 496KB)