March 31, 2016
Japan Economic Update – March 2016
Overall the picture is of an economy struggling to generate any momentum.
- Japanese GDP declined by -0.3% qoq in the December quarter 2015, although compared to the same quarter a year ago, growth was a more respectable 0.8% (s.a.). Business surveys are generally consistent with an economy growing at a modest pace (remembering that ‘modest’ for Japan is slow by the standard of most countries), although the recent falls in the manufacturing PMI are a concern.
- Consumption has been weak given the strength in employment, generally solid consumer confidence and low inflation due to falling commodity prices. This suggests some upside ahead, but the fall in consumer confidence in February is a concern.
- Business investment continues to trend up, but exporters are struggling in the face of global economy weakness and, more recently, Yen appreciation. A support for business investment has come from corporate profits, which rose by 7.5% in 2015 to a record ¥70.8 trillion, although they started to turn down at the end of 2015.
- The main bright spot is the labour market. Labour market conditions remain tight, with the unemployment rate at a low 3.3%. Nominal cash earnings, though, have only increased modestly. The outlook is for modest increases in wages, as corporations such as Toyota have pared back their wage increases from those of recent years.
- Progress towards the Bank of Japan’s (BOJ’s) inflation target has stalled, and inflation is unlikely to reach the BOJ’s 2% inflation target under current policy settings. Given this, the lack of economic momentum, recent Yen appreciation and falls in equity values since mid-2015, we expect the Bank of Japan to decide on a significant monetary easing at its April 2016 meeting. This will likely include expanded QE, a further cut to deposit rates and something akin to the ECB’s financing programs for banks, which allows banks to access funding at a rate as low as the negative deposit rate.
- At the same time, the budget deficit is set to fall again in calendar 2016, suggesting fiscal policy remains a headwind, although by no more than in recent years. However, there are reports that the Government is considering fiscal stimulus measures, possibly to be announced ahead of the late May G7 summit.
- Japan’s current account surplus surged to ¥16.64 trillion in 2015, driven by record tourist arrivals, weak crude prices and earnings from overseas investments.
- Japan’s very strong external position has cemented its safe haven status, resulting in the sharp recent appreciation in the Yen – despite the negative interest rate policy.
- The stronger currency has weakened Japan’s equity markets, with the Nikkei 225 declining close to 20% since its peak. The launch of the BOJ’s negative interest rate policy has elevated volatility in the Japanese Government bond market.
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