Japan’s economy contracts in Q4 2015 on falling private consumption

Japan's economy shrank more than expected in Q4 2015, mainly due to declining private consumption. Before important reforms in the labor market are pushed through, significant convincing turnaround is unlikely. GDP deflator indicates a healthy price growth; however, with the risks from lower oil prices and JPY appreciation, the Bank of Japan is expected to remain dovish.

According to the preliminary data, the Japanese economy contracted 0.4% q/q in Q4. The Japanese economy contracted at an annualised rate of 1.4%, as compared with market forecast of 0.8% contraction and Nordea Research's expectation of 0.3% growth. Meanwhile, GDP figures for Q3 were revised upward from 1% to 1.3%.

Private consumption, mainly responsible for the weak headline growth numbers, contracted 3.3% on annualised terms and subtracted 2 percentage points from the growth. Other components contributed positively to growth but did not give an optimistic picture. Private investment increased 4% on annualised terms; however, it was partly offset by declining public investment. Therefore, overall investment did not contribute to growth. On annualised terms, exports declined 3.4% that was more than countered by the 5.6% decline in imports. Hence, net exports positively contributed to growth.

Japan's Q4 GDP print indicates that the economy is 'not yet out of the woods'. No positive turnaround is seen for the two main growth drivers - corporate spending and private consumption. Wage growth is expected to remain weak, while private consumption is likely to be disappointing before progress is seen in labor market reforms and corporates become confident in improved growth outlook.

GDP deflator was at 1.5%, as compared with expectation of 1.6%. However, this indicates a healthy price growth. This gives a different inflation picture than the CPI data, which only gauges prices faced by the consumers. The positive price growth shown by the GDP deflator, gives lesser incentive for additional easing from the Bank of Japan. However, the risk of a sharp appreciation of JPY and lower commodity prices are still headwinds for the central bank's inflation target rate of 2% in the medium term. Therefore, monetary policy is expected to be very accommodative.