RaboResearch - Economic Research

Japan: Economic recovery on the cards?

Economic Comment

  • Unsurprisingly, the Bank of Japan (BOJ) kept its monetary policy stance unchanged in January
  • But again lowered its inflation outlook for the fiscal years ahead
  • Japanese economy is expected to rebound moderately in the fourth quarter of 2018
  • Scheduled VAT hike for October 2019 is a key thing to watch

BOJ confirms policy stance at first meeting of 2019

For this year we do not expect any major changes in the ultra-accommodative monetary policy of the central bank of Japan (BoJ). The Bank unsurprisingly confirmed its policy stance after a 7-2 vote at its first meeting of 2019 on 22-23 January. As such, they maintained their -0.1% short term policy rate; a 10-year yield target on Japanese government bonds within a range of 20bp around zero percent; and asset purchases required to achieve this target. From this meetings’ statement and Outlook for Economic Activity and Prices it follows that the BoJ will not change this policy stance anytime soon. Recent developments in terms of (core) inflation, the Japanese currency and general economic developments also point in that direction.

Apart from the policy stance, the Bank has revised its inflation and GDP forecasts. For fiscal years (FY)[1] 2018 and 2020, projected inflation was lowered slightly by 0.1% to 0.8% and 1.4% respectively. In FY2019, the Bank now sees core inflation to come in at 0.9% instead of the previously forecasted 1.4%. With regard to these downward adjustments, the BoJ admitted that the projected rate of increase was primarily lower for 2019 due to downward pressure from crude oil prices. These downward adjustments are not surprising given that core inflation (headline excl. fresh food), is still subdued and far from the BoJ’s 2% target (Figure 1). After stabilising at 1% y/y in September and October, core inflation first fell to 0.9% y/y in November before even dropping to 0.7% y/y.

Figure 1: Core inflation still way off target
Figure 1: Core inflation still way off targetSource: Macrobond

For FY2018, the Bank lowered their real GDP projection from 1.4% to 0.9%. For FY2019/20, they expect GDP to come in at 0.9% and 1.0% respectively. Except for 2020, these figures are roughly in line with our own projections we recently published in our economic quarterly outlook [2]. A stronger Japanese yen (JPY) also plays an important role, both for the inflation and economic outlook. The JPY is one of the market’s favoured safe haven currencies and our Financial Markets Research team expects the USD/JPY currency pair to strengthen from 109.5 now to 105 by end-2019. This is both a negative for inflation regarding any upward price pressure from the import side, and the resulting deterioration in price competitiveness also weighs on Japanese exports.  

Next to the inflation outlook itself, another key thing to watch this year is the scheduled VAT hike for October 2019, from 8% to 10%. Given that the Japanese economy entered a recession back in 2014 when the previous sales tax hike took place, it is logical to assume that the BoJ will be cautious to make any move that could undermine consumer spending ahead of that tax change. In the latest summary of opinions, they furthermore admitted that they “cannot be optimistic regarding the outlook for economic activity since cautious views have been increasing against the background of the trade friction between the United States and China”. As such, it is clear that the Bank sees that risks to the general outlook are tilted to the downside for 2019.

Stimulus feeds growth in 2019

The economy contracted in 2018Q3 for the second time in 2018 (Figure 2), but the BoJ expects numbers for Q4 to be better, pointing out that “the restoration of infrastructure has progressed following the successive natural disasters in Q3, as production and exports have picked up after declining”. The GDP contraction in 2018Q3 was higher than previously thought (-0.6% q/q instead of -0.3% q/q). The contraction was broad based among expenditure components (Figure 2). This has led to a downward revision of our economic forecasts for the Japanese economy for full year 2018 growth, but a slight upgrade for 2019. This partly reflects a stronger than previously expected growth in 2018Q4 due to rebound effects, which in turn leads to a positive statistical carry-over effect for GDP in 2019. In the first three quarters of 2019, we have pencilled in a positive and moderate GDP growth led by a positive contribution of private consumption in anticipation of the October sales tax hike. In 2019Q4 we anticipate that GDP will enter negative territory as a result of the sales tax hike.

Figure 2: Steep contraction 2018Q3 confirmed
Figure 2: Steep contraction 2018Q3 confirmedSource: Macrobond
Figure 3: Tankan still points to recovery
Figure 3: Tankan still points to recoverySource: Macrobond

A higher contribution from the government –in terms of fiscal stimulus– is on the cards as well. In December 2018, Japan's Cabinet Office approved budgetary plans worth USD 932bn, which is 3.8% higher than the initial 2018 budget. So next to the BoJ’s ongoing accommodative policy stance, this fiscal stimulus adds to the arguments in favour of higher growth in 2019. But before we can fully turn our focus on 2019, we have to wait for the first preliminary estimate of Q4 GDP to round-up 2018. Figures for October and November so far point to moderate instead of a strong rebound in that quarter. The initial gains in terms of household spending and industrial production in October seem to have faded in the month after. Also net trade is expected to remain a drag on growth in the fourth quarter of 2018. Still, sentiment indicators, such as the Tankan index and PMIs point to growth for end or 2018 (Table 1, Figure 3). But it should be noted that January 2019 manufacturing PMI has dropped to a level of 50. Given that a level below 50 points to contraction, this certainly is something to keep a close eye on. 

Table 1: Mixed figures so far in 2018Q4
Table 1: Mixed figures so far in 2018Q4Source: Macrobond
Note: All figures are percentual changes in real and seasonally adjusted terms


[1] Fiscal year runs from April to March instead of January-December.

[2] Our yearly Jan-Dec real GDP projections for 2018, 2019 and 2020 are respectively 0.8%, 1.0% and 0.7%.

Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864

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