In Q4 2016, growth in the Japanese economy lost a little momentum. Despite greater government spending, economic growth was +1.0 percent on the prior quarter on an annualised basis, and somewhat weaker than expected. In the prior quarter the figure reported was +1.4 percent. The most recent figure is disappointing to the extent that in the wake of the government’s new fiscal package the general expectation was for stable, robust growth in the last three months of the year. It was, however, positive that for 2016 as a whole Japan did not post negative growth in any single quarter, meaning that slight progress was made in stabilising the economy. The Yen tended weaker again of late and this will no doubt have helped, as this supports Japan’s exports. Real economic growth in 2016 as a whole amounted to +1.0 percent, as we had forecast.
Given the latest economic figures for the past year, we are upholding our previous outlook for Japan’s gross domestic product. With the stimuli from the current fiscal package gradually coming to an end and a lack of further devaluations of the Yen, we expect that this year and next year will both only see weak growth, of +0.9 percent (2017) and +0.8 percent (2018) respectively.
The slight dip in growth in Q4 was primarily caused by weaker domestic demand. Private consumer spending as the most important element of demand stagnated, despite all the discernible improvements in private household sentiment in the final three months, having in the third quarter still increased by 0.3 percent. The braking effect this had was not offset by the fact that public-sector expenditure rose +0.4 percent. Gross investments in fixed assets were not as dynamic as expected, despite the stimuli of the latest round of fiscal measures, and only edged up +0.25 percent (on the prior quarter, simple rate). By contrast, exports made a clear, favourable impact, climbing +2.6 percent on the prior quarter, on the back of +2.1 percent in the third quarter. However, imports also rose, so that the contribution made by overall foreign trade remained negative in the final quarter.
One reason for the essentially weak private consumer demand of late is no doubt the fact that real wages have stagnated recently. Without the income of private households rising, the medium-term economic recovery in Japan could swiftly come under threat again. It remains to be seen whether this year’s round of wage increases in manufacturing, which as a rule kicks off with the yearly “spring drive” by the trade unions (“Shunto Round”) in March, will bring employees tangible salary increases. The government and the central bank have for some time been advocating clear increases in nominal wages in order to give the economy finally a demand-driven, sustainable boost. The current earnings position of the major corporations, which is benefiting from the exchange-rate trend, is hardly likely to get in the way of a rise in employees’ wages.