Japan – economic activity held back by weak consumption

Following the downward revision in June, Japan’s growth figures from the first quarter are now by no means as impressively positive as they were before. The growth pace has literally halved to only just +0.3 percent (q/q). This has had a somewhat dampening effect on the economic optimism of the spring.

Key sentiment indicators offer a mixed picture as to whether Japan’s economy will stay on „target“ as the year continues and possibly even expand further at a higher pace than at the beginning of the year. The recent Tankan Index of the Bank of Japan, a sentiment barometer for the corporate sector, recently sent out a number of positive signals. Towards mid-year it had developed better than expected, at least for large-scale industry.

In contrast, the consumer climate has only been trending sideways since the beginning of the year. The export-driven industry, which has been underpinned by the improved demand from abroad and the depreciation of the Yen since the beginning of the year, stands opposite a relatively moderate domestic demand. Consumers continue to show a degree of reluctance and shy away from risk. Whether and when a new fiscal stimulus package will come that might succeed in bolstering the Japanese economy in the next few quarters and into the next year is currently a matter of pure speculation.

Will Japan’s economy be able to keep up its momentum even without further fiscal aid? In terms of the good export trade, the positive stimulus could well continue for a while. As regards the weaker domestic demand, however, it is important to bear in mind that it will be far more difficult to kindle a more dynamic development here. This is largely attributable to the only moderate wage development.

Last year, aggregate wages increased in average nominal terms by only +0.5 percent. In terms of figures, consumer spending power received a boost by the fact that inflation stood way below zero in the summer half-year of 2016 and remained negative during the year as a whole. This year, a somewhat different situation can be seen emerging: while nominal wage growth remained very low from January to April, the income gains derived from this have been completely wiped out by the positive inflation rates being recorded again since last October. In real terms, therefore, consumers are currently left with no purchasing power growth. Companies will likely remain reluctant to grant wage increases because they want to avoid competitive disadvantages. On the other hand, employees and trade unions are evidently happy with the relatively low wage increases. They hope that this will ensure job security for them and a stable social climate.

Given the still not very high degree of optimism in the corporate sector, we see little prospect of Japan recording growth rates in the second quarter as well as until year-end 2017 that will show a higher momentum than that of the first quarter. Not only is investment activity likely to remain limited. Private consumption will also likely reveal the ongoing negative effects of the sluggish wage momentum. In contrast, Japan’s exports will remain very competitive in currency terms and, for the time being, will continue to encounter very brisk demand on its most important overseas markets. For the whole of 2017, we therefore forecast GDP growth of +1.2 percent, i.e. somewhat above the potential growth rate, and for next year we forecast a growth rate of 1.0 percent.

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