If the Japanese market is of interest, read the CBI Economic Outlook
28 Mar 2018
CBI International Economic Outlook - JAPAN
The Japanese economy carried decent momentum into 2018, with a global upswing helping to underpin Japan’s longest expansionary cycle since the late 1980s. The recent yen bull run represents a strengthening headwind for exporters this year, but domestic demand should remain firm. Fiscal and monetary policy will remain ultra-accommodative over the coming quarters, although we do not see inflation reaching the BoJ’s target of 2.0% over the coming quarters.
Entering 2018 on a strong footing
Most lights were green for the Japanese economy at the turn of the year. With GDP growth coming in at 1.6% (annualised), Q4 2017 marked the longest expansionary phase (eight consecutive quarters) for Japan since a three-year long run that ended in 1989. At 1.7% in 2017 as a whole, real GDP growth was the strongest for four years. The current expansion has been underpinned by robust corporate investment (3% in 2017), strong exports (6.8%), and a tepid recovery in household consumption (1%, though this was still much stronger than 0.1% in 2016).
Against this backdrop, business confidence among large manufacturers rose to an eleven-year high in Q4 2017, according to the Bank of Japan’s (BOJ) Tankan survey, while the unemployment rate reached 2.4% in January, a 25-year low. The jobs-to-applicants ratio stood at 1.59 in January, unchanged from the previous month and the highest since January 1974.
Yen appreciation weakens 2018 outlook
The biggest downside risk to the ongoing expansionary cycle is the recent appreciation of the yen, which has strengthened by more than 5% against the US dollar since the beginning of the year (hovering around the ¥106 level at the time of writing). The yen’s rapid appreciation is particularly ill-timed, with large manufacturers finalising their investment plans for the financial year starting in April, based on a forecast exchange rate of ¥110:$1, according to the latest Tankan survey. A continued appreciation of the yen is likely to drag on exports, corporate profits and investment, and could in turn cool business and household sentiment. The BoJ would likely shy away from directly intervening on FX markets to weaken the yen over the coming quarters, given that this would significantly stoke up tensions with an increasingly protectionist US. However, we continue to believe that the growing divergence between US and Japanese monetary policies will lead to the yen depreciating against the US dollar later this year.
Economic policy to remain supportive
Fiscal and monetary policy will remain ultra-accommodative over the coming quarters. Shinzo Abe’s party won a super-majority in the October 2017 snap legislative elections, giving it a strong mandate to push ahead with fiscal and monetary stimulus, as well as structural reforms, a three-pronged strategy initiated in 2013.
Mr Abe’s reappointment of Haruhiko Kuroda – the architect of the ongoing monetary stimulus – as governor of the BoJ in Febraury is a strong signal of the government’s intention to remain on the same monetary policy track: Mr Kuroda will be the first person to serve a second term at the BoJ since 1961.
While Mr Kuroda hinted at pulling back on the BoJ’s massive fiscal stimulus by 2019, during a speech to Parliament in early March, we believe that the probability of this happening is low. Indeed, Mr Kuroda conditioned tightening monetary policy on inflation reaching the BoJ’s target of 2%. In February, headline inflation stood at 1.0% (all items less fresh food), while core inflation (which excludes fresh food and energy), stood at 0.5%. It seems unlikely that the 2% target will be reached by 2019 given modest growth in household consumption, the likelihood of weak pay increases (again) following this year’s annual shuntō wage negotiations (between unions and employers) and, not least, the recent appreciation of the yen.