Japan’s economic performance remains subdued

Japan's economic performance remains subdued despite Prime Minister Shinzo Abe's enduring efforts to revive the economy. Nevertheless, revised data show that the economy has avoided another technical recession; real GDP grew by 0.3% q/q (+1.7% y/y) in the third quarter, following a 0.1% q/q contraction (+0.7% y/y) in the April-June period. 

The government's supplementary budget will provide short-term support to the economy; in mid-December, the Cabinet approved a ¥3.5 trillion additional spending package for the ongoing fiscal year (April-March). New debt will not be issued for financing the extra budget as it will be funded by tax revenues. An ultra-accommodative monetary policy stance will remain in place for the foreseeable future; however, further stimulus in the form of quantitative easing is unlikely. 

Monetary authorities remain confident that the Bank of Japan's price stability target of 2% y/y will be achieved with the help of the current asset purchase program, which is set to increase the monetary base by ¥80 trillion annually. According to policymakers' estimates, inflation will reach the target between October 2016 and March 2017. 

"In our view price pressures will remain more muted until April 2017 when the second hike in the consumption tax rate (from 8% to 10%) will temporarily lift inflation. Headline inflation remained low at 0.3% y/y in November, though core inflation - excluding food and energy - has picked up to 0.9% y/y. We expect the headline rate to accelerate gradually to 1.0% by the end of 2016", says Scotiabank.