Japan GDP Preview: Q4 Contraction to Strengthen Case for Further Easing

Upcoming GDP growth figures from Japan are expected to show the economy contracted last quarter. Combined with the recent strength of the Japanese yen, weak domestic activity will add to calls for policymakers to continue easing policy.

Tokyo – Japan’s economy likely experienced another contraction in the December quarter, with weak consumer spending and declining exports taking a big toll on growth, underscoring why leaders are determined to support the economy.

Analysts expect that the world’s third-largest economy shrank 0.2% in the October-December period, after expanding 0.3% in the September quarter.

Consumer spending is likely to have been one of the biggest drags on the economy last quarter, with weak wage growth curbing a rebound in consumer demand. Senior Japan economist at Capital Economics Marcel Thieliant said in a note that the drag from consumer spending last quarter could be as large as 0.5 percentage points.

Monday’s GDP growth figures will add to the wave of dire news out of Japan in recent weeks, including lackluster household spending, industrial production, machinery orders, and inflation figures.

To add to the doom-and-gloom facing Japan, stock prices have plummeted more than 15% since the start of the year and the Japanese yen has strengthened around 7% against the US dollar.

The yen’s solid appreciation occurred despite the Bank of Japan (BoJ) announcing a new negative interest rate policy at the end of January, an attempt by the central bank to offset the impact weak Chinese growth has had on Japan’s economy and domestic inflation.

BoJ on the defensive

In annual terms exports fell in all three months of the December quarter, which is only offset by the fact that imports fell at much steeper rates in each month. Net exports should therefore add to growth over the fourth quarter, though weak exports will be a major concern for policymakers, particularly with the renewed appreciation of the Japanese yen, which threatens to decrease the competitiveness of Japan’s exports further.

Since the BoJ introduced its negative interest rate policy on January 29 the yen has appreciated around 5% against the greenback, raising speculation that the central bank will broaden stimulus measures over the coming months.

“The BoJ’s recent negative rate announcement which was indirectly intended to weaken the yen highlights that Japan still has a preference for a weaker yen which is currently being challenged,” Bank of Tokyo-Mitsubishi UFJ (BTMU) currency analyst Lee Hardman said in a note on Thursday. “It is increasing the likelihood of further BoJ monetary easing at their next meeting in mid-March when rates could be cut deeper into negative territory and asset purchases increased.”

The yen’s appreciation despite the economy’s lackluster performance has largely been the result of safe-haven demand amid the rapid increase in market volatility, as well as a reduction in market pricing of US interest rate hikes.

Given the current circumstance, more monetary easing will be needed before too long, Thieliant noted, adding that short-term interest rates are likely to drop much further.

 

Original Article: W B P Online

 

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