Japan’s economy likely to continue expansion, underpinned by highly accommodative financial conditions: ANZ Research

The Japanese economy is expected to continue its expansion, underpinned by highly accommodative financial conditions. Private demand should be supportive as a virtuous cycle from income to spending is expected to be maintained, both in the corporate and household sectors.

Japan is experiencing its longest expansion in over a decade. Real GDP grew by 2.5 percent q/q annualized in Q2 2017 vs 4.0 percent in the initial report. The difference reflects a downward revision to CAPEX. Despite the downward revision to GDP, the Japanese economy grew at a well above-trend pace in Q2.

Further, the CAPEX outlook is favorable amid ongoing healthy corporate profitability and a need to invest in labor-saving investment to address growing labor shortages. Public investment growth may ease a touch, but stay elevated owing to Olympic Games-related spending.

Finally, external demand should continue to provide modest support. Notably, the strong run of growth – nine quarters of above-trend y/y growth – has resulted in the BoJ’s estimate of the output gap moving into positive territory and the unemployment rate falling to 2.8 percent as of July 2017, its lowest since 1994. The BoJ is confident that expectations will shift as wages and prices are lifted owing to the positive output gap.

"We think that the rise to 2 percent sustained inflation will take considerable time. In July 2017 the central bank pushed back the timing of when it expects inflation to reach its target, to fiscal 2019 from fiscal 2018. This means monetary policy will stay very stimulatory for some time," ANZ Research commented in its latest report.

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