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Japan: bouncing, or just bouncing along the bottom?

Economic Quarterly Report


Japan’s Q4 GDP data were not happy reading. Total QoQ growth was 0.6%, not much of a rebound from a -0.6% drop in Q3, and less than the 0.9% market expectation. Consumer spending also rose just 0.3% QoQ, as in Q3, while business spending was up just 0.1% QoQ after the -0.1% print in the previous quarter. Perhaps the only area for comfort was that the GDP deflator hit 2.3%, up from 2.0%. Yet even this just showed that much of what passed for growth in Q4 was a rise in prices rather than in inflation-adjusted real output. In fact, in real terms Japan did not see any GDP growth at all in 2014, the worst annual performance since 2009.

External demand is leading the way

Where there have been some more encouraging Japanese data of late, the onus is still far more on external than domestic demand, and exogenous rather than endogenous factors. True, machine orders surged 24.1% MoM in December, the most since June 2006, while core orders (a leading indicator for future capital spending) rose 8.3% MoM and 11.4% YoY. These are always a very volatile series, and had seen a notably weak report in November, but the scale of the rebound led the report to note that “gradual recovery can be seen”, which was the first upgrade in the outlook since August 2014.

Table 1: Key figures Japan
Table 1: Key figures JapanSource: NiGEM, Rabobank

Yet arguably much of the momentum here stemmed from export growth, which was considerable in December too, rising 12.9% YoY in nominal terms, while imports were up just 1.9%, and therefore seeing the unadjusted trade deficit decline from JPY895bn to JPY661bn. Notably, rising nominal exports are the result of the drop in the exchange rate over the last year (USD/JPY ended December 2013 at 105 and December 2014 at 120). That policy of ‘currency war’ was always bound to generate some export momentum eventually (or at least until trade partners play ‘catch up’). Yet on the other hand, the low import figure - key to narrowing the persistent trade deficit - is a reflection of the drop in global energy prices more than anything else. In other words, it is Saudi Arabia, not the Japanese government, that one should be thanking if one can see at least partial signs of a net export-led bounce in the economy. That’s especially true as the Abe government is still doing nothing major on structural reforms: that ‘third arrow’ must be getting rusty sitting in its quiver. Overall, we see 2015 GDP growth at just 0.7% YoY, although this is largely due to the high base of comparison for household consumption in Q1 this year compared to that of Q1 2014. Net exports will, not surprisingly, also account for around half that total.

If you can’t hit a target, change that target?!

Meanwhile, the BOJ continues to face the prospect of failing to meet its ‘two-year, 2%’ sustainable CPI target despite the proportionately-largest QE program of all central banks, and one that was only expanded as recently as November. With energy prices plunging, and even more importantly, the base effects from April 2014’s sales tax hike about to drop out of the base of comparison, it seems assured that inflation (2,4% in January) will be back below 2% within a few months. What the BOJ can actually do about that remains unclear. In January policy meeting minutes the BoJ emphasized a ‘moderate recovery’ and argued that nominal wage growth is rising: it is, but we note that real wage growth is collapsing.

Figure 1: Inflation will head down going forward
Figure 1: Inflation will head down going forwardSource: CEIC, Bloomberg, Rabobank
Figure 2: A ‘moderate recovery’?
Figure 2: A ‘moderate recovery’?Source: Bloomberg, Rabobank

Pointing to a similar way to deal with the problem of missing a target (i.e., change what you are looking at to meet your goals), Koichi Hamada, an advisor to Prime Minister Abe, gave an interview on 23 February that claimed the BOJ would not lose credibility if it extended its two-year CPI target timeframe to three years, or lowered its 2% CPI target level to 1%! Exactly how this would not be an admission of defeat is very hard to see: after all, if headline CPI is being dragged lower by oil prices then the answer should be to look at core CPI (which was at 2.1% YoY in January, but which is also going to head significantly lower from Q2 2015 onwards) rather than to cut the target in half. Arguably, the only alternative is for the BOJ to increase QE further again. However, we are already approaching the point at which the market may balk at further such central bank action. 10-year JGB yields are now around 0.32% against a record low of 0.20% in January: that arguably reflects an increased unwillingness to hold JGBs when the market is growing ever-more dominated by the BOJ rather than any belief that Japan’s inflation prospects are increasing.

Michael Every


The Economic Quarterly is a publication of Economic Research (KEO) of Rabobank and a co-production with Financial Markets Research.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

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Abbreviations for sources: CBS: Statistics Netherlands, EIU: Economist Intelligence Unit, NIESR: National Institute of Economic Social Research, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development.

Abbreviations used for countries: GB: Great Britain (UK), IE: Ireland, US: United States, HU: Hungary, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, PL: Poland, AT: Austria, FR: France, GR: Greece, TR: Turkey, ID: Indonesia, JP: Japan, BR: Brazil, RU: Russia, CN: China, BE: Belgium, FI: Finland, DK: Denmark, LT: Lithuania, EE: Eurozone, CY: Cyprus, PT: Portugal, SI: Slovenia

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Allard Bruinshoofd, head of International Research, Economic Research
Tim Legierse, head of National Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

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