Japan First Quarter GDP Outlook: World’s Third Largest Economy Likely Escaped Recession, but Underlying Risks Remain

Japan narrowly escaped recession in the first quarter, according to a broad view of market analysts, but weak domestic demand and a volatile global economy will continue to stall recovery efforts in the world’s third largest economy.

Gross domestic product (GDP) – the value of all goods and services produced in the economy – likely expanded 0.6% year-over-year in the first quarter, according to a median estimate of economists polled by Reuters. The uptick would mean that Japan narrowly escaped recession after contracting 1.1% annually in the final quarter of last year. A technical recession is identified when an economy contracts in back-to-back quarters. Japan’s GDP has contracted in two of the past three quarters.

On a quarter-on-quarter basis, the economy is forecast to grow just 0.1% after shrinking 0.3% in the fourth quarter.

Private consumption, which represents about 60% of Japan’s GDP, is expected to be the main driver of growth in the first quarter. On a quarterly basis, private consumption is expected to grow 0.2% following a 0.9% plunge in the final three months of 2015. However, economists expect capital spending to decline amid dismal external demand. Additionally, some analysts are suggesting that an expansion in the first quarter would mostly reflect the extra day in February from the leap year.

The Cabinet Office will release the first quarter GDP figures Wednesday, May 18.

Japan’s overall economic picture remains negative, as the country struggles with weak inflation and uneven global demand. Japan fell back into deflation in March for the first time in nearly two years, defying the central bank’s massive stimulus efforts to re-inflate the economy.

The Bank of Japan (BoJ) embarked on negative interest rates in January, much to the dismay of corporate banks. The BoJ intends to evaluate the impact of this unconventional policy tool before introducing additional stimulus measures. The central bank shocked the markets last month when it held off on making any changes to monetary policy despite consumer prices falling. Many market participants believe it is only a matter of time before the central bank expands both the size and scope of its quantitative and qualitative easing program.

The International Monetary Fund (IMF) is projecting growth of 0.5% for Japan this year, unchanged from 2015. The IMF is also forecasting the possible return of recession next year. Japan’s GDP is projected to contract 0.1% in all of 2017.

A stronger yen is also expected to complicate the country’s recovery efforts, not to mention the BoJ’s stimulus program. The yen has gained around 10% against the US dollar this year, having traded at 18-month highs on multiple occasions. The dollar-yen exchange rate referenced by the global financial markets rebounded over 1% last week to close at 108.6250.

Since bottoming out near 15-month lows on May 2, the US dollar has gained over 2% against a basket of global currencies. The US currency closed up half a percent against global peers on Friday, its eighth advance in the past nine days.

Economic Calendar

In addition to official GDP figures, Japan will release several other batches of economic data this week. On Monday the Japan Machine Tool Builders Association will release data on machine tool orders for April, a key indicator of business conditions in the manufacturing sector.

On Tuesday, the Ministry of Economy, Trade and Industry will release official industrial production figures for March, which could provide clues about first quarter GDP growth. Industrial production is a closely followed indicator of factory output. The report will also be accompanied by the monthly capacity utilization rate.

Wednesday will be a highly active day in terms of economic data. In addition to first quarter GDP results, the government will release official machine orders data for March. Separately, the Ministry of Finance will report on foreign bond investment and foreign investment in Japanese stocks.

On Thursday, the Ministry of Economy, Trade and Industry will release its monthly all industry activity index for March, which captures monthly changes in overall production.

On Friday, the Bank of Japan will release its latest monetary policy meeting minutes, which will be closely watched by the global financial markets.

 

Source: Economic Calendar

 

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