Japanese economic outlook remains weak, mainly driven by struggling consumer

The economic outlook for Japan continues to be weak. In Q4 2015, the nation’s real GDP growth entered the negative territory again as output fell 0.3% q/q and grew 0.8% y/y after a growth of 0.3% q/q and 1.7% y/y in Q3. The weakness in the economic growth was mainly driven by a struggling consumer. For the entire 2015, the Japanese economy expanded 0.5%. The economy is likely to rebound only moderately in 2016 with output growing 0.7% as weak wage growth will depress consumer spending.

However, private sector investment is expected to be strengthened by higher corporate profits. Economic activity, mainly in terms of consumer spending, is expected to see a noticeable rebound at the end of 2016 and in early 2017 before the consumption tax rate is hiked from 8% to 10% in April 2017. Japan’s real GDP growth is expected to average 0.6% in 2017.

Meanwhile, the Bank of Japan is likely to maintain loose monetary policy for the near future as it implements “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate”, which it introduced in January 2016. The BoJ, apart from expanding the monetary based by ¥80 trillion annually via large-scale asset purchases, it also applied -0.1% interest rate to excess deposits of financial institutions at the central bank.

The central bank Governor Haruhiko Kuroda has emphasized that the policymakers are ready to further ease policy of the 2% price stability target for core inflation is at risk. As Kuroda said that changing the deflationary mindset of Japanese people might be delayed, it is likely that the aforementioned risk has materialized and that additional monetary stimulus is expected from the central bank in the near term. According to the central bank, the target rate for inflation will be attained in between April and September 2017. In January both core and headline inflation returned to 0% y/y. Excluding energy costs, prices increased 0.7% y/y.

“Inflation is set to remain muted until April 2017 when the hike in the consumption tax rate will temporarily lift price gains; we expect the headline rate to close 2017 at 1½% y/y”, says Scotiabank.

Meanwhile, fiscal policy of Japan continues to be structurally weak. Nonetheless, the parliament had approved a ¥3.5 trillion supplementary budget for the ongoing fiscal year in January. No new debt will be issued for financing the additional expenditures as tax revenues will fund it. The fiscal deficit is expected to average 4.5% of GDP in 2016-2017. Japan’s trade deficit has narrowed significantly as low oil prices reduced the import bill and the weak yen has helped exports. In 2016-17, the current account surplus will be maintained at around 3.5% of the GDP with the help of strong primary income account balance.