Japan: Weak domestic demand weighs on growth in Q4

Although the economy managed to expand for the fourth consecutive quarter in Q4, growth softened in the October-December period as a result of stagnating private demand. Conversely, a weak yen is boosting exports and business investment. GDP expanded 1.0% in Q4 over the previous quarter in seasonally-adjusted annualized terms (SAAR), which was somewhat lower than the 1.4% increase in Q3. Q4’s expansion was broadly in line with the 1.1% increase that market analysts had expected. On an annual basis, the economy increased 1.7% in Q4 (Q3: +1.1% year-on-year), bringing full year growth for 2016 to 1.0% (2015: +1.2%).

Modest wage growth continues to limit any upswing in household spending, casting doubts on whether the country can escape from two decades of sticky deflationary pressures. Private consumption recorded zero growth in Q4, down from Q3’s 1.3% expansion. Conversely, strong dynamics in Japan’s external sector and the Central Bank’s accommodative monetary policy are boosting confidence among business, propelling private non-residential investment (Q3: -1.3% quarter-on-quarter SAAR: Q4: +3.8% qoq SAAR).

A weak yen and the gradual recovery in global demand caused growth in exports of goods and services to accelerate to 11.0% (Q3: +8.5% qoq SAAR), which represented the fastest expansion in two years. Imports grew 5.4% (Q3: -1.0% qoq SAAR) on the back of rising prices for raw materials. Moreover, despite the slowdown in private consumption, analysts believe that Q4’s robust import reading signals that underlying domestic demand is strengthening.

Overall, the Japanese economy is increasingly relying on the external sector to keep growth afloat. Therefore, U.S. President Donald Trump’s protectionist policies are endangering Japan’s economic recovery. The U.S. is Japan’s biggest export market after China. In this regard, Prime Minister Shinzo Abe is trying to ease political tensions with Trump as, during his campaign, the U.S. President called Japan a currency manipulator and accused the country of not paying its fair share of military defense.

The Bank of Japan (BoJ) expects the economy to expand between 1.3% and 1.6% in the fiscal year 2017, which ends in March 2018. In the subsequent fiscal year, the BoJ sees GDP growth of between 1.0% and 1.2%. FocusEconomics Consensus Forecast panelists see GDP expanding 1.0% in calendar year 2017, which is up 0.1 percentage points from last month’s projection. In 2018, the panel sees the economy growing 0.8%.