Only slight recovery in Japan’s economy at 2018 year-end

According to a first official estimate, the Japanese economy grew by 0.3% in the fourth quarter 2018 compared with the previous quarter. The economy had thus managed to recover somewhat from the 0.7% slump in the third quarter resulting from natural events (earthquakes, severe typhoon season), albeit not to the extent originally anticipated. A growth rate for 2018 as a whole has now been recorded of 0.7%.

Private consumption in Japan, the most important demand component, developed generally well towards the end of the year and, with a gain of 0.6%, was able to more than compensate the decline from the previous quarter. Corporate investment activities, which were particularly adversely affected in late summer by earthquake-related interruptions in supply chains and production stoppages, have also risen again recently. The increase of 1.5% on the third quarter was not sufficient to offset the previous quarter’s negative rate. The same applies to exports. These are now evidently more adversely affected by the weaker demand dynamics in China. The trade conflict between China and the USA remains unresolved and is thus dampening Chinese demand for industrial intermediate goods from Japan. After all, with its intermediate goods for the manufacturing industry in China, Japan also plays a key part in the value creation of Chinese export production for the USA which has been subjected to „punitive tariffs“. At least Japan’s direct vehicle exports to the USA managed to recover considerable lost ground at the end of the year.

For this year, however, there are few grounds for feeling optimistic about Japan’s economy. The majority of sentiment indicators have been pointing downwards of late. The government’s consumer climate index deteriorated in January for the fourth time in a row. The propensity to make purchases has suffered in particular, partly because private households expect the forthcoming Shunto wage round to result in only moderate wage increases overall.

Following the relatively weak final quarter 2018, we expect growth to remain limited to around 0.8% this year. From mid-year and in anticipation of the VAT increase announced on 1 October (from 8% to 10%), demand for more expensive consumer goods will probably strengthen, but the final quarter of the year will most likely be negative. In the Olympic Games year of 2020, we also expect Japanese economic growth to remain well below 1% as the higher value-added tax can be expected to halt consumer spending for some time to come.

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