In final-quarter 2017, the Japanese economy grew only +0.1 percent on the prior quarter, which was well below expectations. In the second and third quarters Japan reported growth rates of +0.6 percent in both instances. The weak year-end figure somewhat obscures the fact that of late domestic demand has been decidedly buoyant. Thus, in Q4 / 2017 above all private consumer spending more or less recovered from its drop in the prior quarter, and private investment activities excluding housing construction posted clear growth. The fact that investments in plant and equipment nevertheless decreased overall has to do with the fact that the government has recently appreciably scaled back its investments. Government consumer spending was also down at year-end.
The Japanese upturn has now endured for no less than eight quarters, and aggregate economic growth for the year ran at 1.6 percent. All the same, the latest figures for the fourth quarter indicate that there are considerable risks to the country’s economy. The strong reliance on imported energy caused imports to shoot upwards in the final quarter. This was the main reason why growth in the last quarter was so low despite the clear increase in Japanese exports. Specifically in a phase of fast and sharply rising oil prices, such as that since year-end, trade account surpluses that existed can melt away like snow in the sun and a macroeconomic imbalance can swiftly emerge again.
The economic momentum has in other words now faltered, mainly owing to the country’s reliance on oil from outside. And the fact that the government has of late no longer opted for fiscal policy stimuli may also have contributed to the weakness. Yet the Japanese upturn would have had to weaken sooner or later anyway, or at least normalise, as the growth rates recorded until the autumn of last year were in part well above the country’s potential rate and therefore not sustainable. The Japanese central bank now has every reason to continue with its extremely expansionary monetary policy for the foreseeable future. Moreover, business now awaits clear statements from government as regards further-reaching structural reforms, especially for the labour market.