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Japan: what’s the shape of things to come?

Economic Quarterly Report

  • From pockets of weakness in strength to pockets of strength in weakness: Japanese GDP growth falls back in second quarter to 0%, after a very promising start of the year (0,5%)
  • There are different views on how the Japanese economy is actually performing
  • The Rubicon lies ahead: the BoJ could possibly turn to more unconventional monetary policy

From pockets of weakness in strength to pockets of strength in weakness

Japan’s Q2 GDP data were as negative a surprise as Q1 had been positive; but, ironically, just as Q1 data suggested more weakness than was shown in the strong 0.5% q-o-q headline, so Q2 data may have overlooked some pockets of strength despite seeing overall growth unchanged q-o-q. There was certainly nothing positive in terms of household consumption volume in Q2, however, this rising just 0.2% q-o-q vs. 0.7% in Q1, the latter pace never looking likely to be maintained. Moreover, government consumption was up just 0.2% in real terms q-o-q vs. 0.9% in Q1, although public investment played a much more helpful role, leaping 2.3% q-o-q in Q2, the fastest since Q3 2013, and reversing successive prints of 0.1%, -3.3% and -1.9% over the previous three quarters. That upswing in state spending was especially welcome since private non-residential investment fell 0.4% q-o-q, following on from a fall of -0.7% Q1. That was obviously a worrying signal; yet private residential investment surged 5.0% q-o-q, the biggest increase seen since Q3 2011. In short, therefore, the domestic demand picture was of sluggish consumption, supportive state investment, cautious businesses, but optimistic real-estate developers. Meanwhile, the external backdrop was far from positive: exports dropped a hefty 1.5% q-o-q while imports shrank just 0.1%, meaning that trade made a significant negative net contribution to total GDP growth.

Table 1: Key data Japan
Table 1: Key data JapanSource: Macrobond, NiGEM, Rabobank
Figure 1: Growth in second quarter falls back
Figure 1: Growth in second quarter falls backSource: Macrobond

Two views on the data don’t help matters much

That’s a confusing set of conflicting signals for the Bank of Japan (BoJ) to grapple with. Yet things are made worse by a new analysis from their own in-house economists that suggests the Japanese economy may be on a far stronger footing than the official Cabinet office statistics state. Notably, a BoJ economic research team believes that 2014 GDP, the latest year for which these estimates are available, was JPY 29.5 trillion (approximately EUR 258 bn) larger than official data show. Although the detailed methodology used is unclear this appears to centre on a higher calculation of company profits and workers’ incomes based on tax payments. Of course, this may not be accurate: it certainly suggests a counter-intuitively positive, rather than the consensus negative, reaction to the 3-percentage point hike in sales tax in 2014. It’s also unclear if this represents the BoJ’s official view of the economy, but Governor Kuroda has publicly called for an improvement in how economic data are collected; indeed, the Bank has also recently started to track its own in-house indicators of household consumption and inflation.

The Rubicon lies ahead

The timing of such a potential split in thinking is certainly inauspicious given that Japan appears to be approaching a critical inflection point in terms of economic policy. At its end-July policy board meeting, the BoJ opted not to increase its extraordinarily-loose monetary stance, which it dubs QQE (meaning Qualitative and Quantitative Easing), but pledged to review the success (or rather lack of success) of its policy at its 21 September meeting. This examination has been predicated by the fact that GDP growth is still weak, and inflation is once again below zero on a headline basis vs. an official 2% CPI target, despite massive Japanese Government Bonds (JGB) buying that has already seen the BoJ swallow around a third of the total market, distorting it in the process. Crucially, the financial markets are testing the BoJ’s willingness to further increase QQE; this already resulted in a sharp sell-off in JGBs in late July and early August.

Figure 2: Exchange rate approaches psychological 100 level
Figure 2: Exchange rate approaches psychological 100 levelSource: Macrobond

Moreover, we have also seen a further rally in the yen that has pushed USD/JPY back to the psychological 100 level, which illustrates the loss of confidence in markets that the BoJ will be successful in further pushing down the yen. It remains to be seen what more the BoJ can do alone, especially with the limitations of the (huge) JGB market to work within. Consequently, there is a growing belief that Japan may be forced to more closely align fiscal and monetary policy to ensure a fresh supply of JGBs for the BoJ to buy. With a public debt to GDP ratio of around 250%, such an outcome (The BoJ financing new public spending) would arguably be a clear example of monetary financing and could even result in a de facto form of “helicopter money”. That is something that would have enormous global implications given that the US and Europe both appear to be following Japan down the path of low/er growth and low/er inflation. Of course, should the BoJ disappoint the markets once again then a further sell-off in JGBs and/or another sharp rally in JPY can be expected: it goes without saying that neither of these would bode well for Japan’s economic outlook going forward.


The Economic Quarterly is a publication of Economic Research of Rabobank and a co-production with Financial Markets Research. The date of completion is the 6th of September 2016.

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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The use of this publication in whole or in part is permitted only if accompanied by an acknowledgement of the source. The user of the information is responsible for any use of the information. The user is obliged to adhere to changes made by the Rabobank regarding the information’s use. Dutch law applies.

Abbreviations for sources: CBS: Statistics Netherlands, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development, CPB: Economic Policy Analysis, IMF: International Monetary Fund, ECB: European Central Bank, BoE: Bank of England, BoJ: Bank of Japan, Fed: Federal Reserve.

Abbreviations used for countries/regions: UK: United Kingdom, US: United States, JP: Japan, EZ: eurozone.

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Editor-in-chief: Wim Boonstra

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Michael Every
RaboResearch Global Economics & Markets Rabobank KEO
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