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Global Ou utlook – 25 November 2015 2
Japa an – So fa ar, a poo or score card for Abenom mics
Marritza Cabezas Sen nior Economist Tel:: +31 20 343 5618 8 marritza.cabezas@nl..abnamro.com
We expect GDP P growth to increase to 1% in 20166, slowing to o 0.6% in 201 17 We maintain ou ur view that inflation will rise in thee coming qu uarters, but thatt the BoJ wiill undersho oot its 2% inflation targeet nted with fis We expect furth her monetarry stimulus,, complemen scal measurres to prepare p the e economy fo or another co onsumption n tax hike in n 2017 cal recession Japan in a technic Japan’s economy rema ains weak and progress appe ears to have staalled. Indeed, the t economy contracte ed in Q2 (-0.7% %) and in Q3 (--0.8%). Household spending has been volatile, while the corporatte sector has b een restrained d, despite high profits. Indeed , third quarter data d showed th hat corporatte investment w was a drag on growth g due to weak w capital exxpenditure and d the fact that the contributtion of inventorries turned sha arply negative. On top of this, the contributio on of export growth is s still lacklustre e. Meanwhile, the t growth slow wdown in emerrging markets, particularly China, is s affecting fore ign demand. Looking ahead, we think that iin order for the economy to grow above trend (0.4%) in 2 2016, Japan’s policymakers will w have to annnounce a comp prehensive fisccal stimulus s programme allongside additional monetary easing. This sshould unlock increased househo old spending an nd trigger firms s to boost busin ness spending.. This will result in a more resilient economy, pavving the way forr the consumpttion tax hike in 2017.
GDP growth: g more e than a soft patch? p contribution to GDP G in % 10 5 0 -5
Investmen nt Governme ent consumption Inventorie es Net exporrts Private co onsumption GDP grow wth
-10 -15 -20 1 Q1 201 12
Q3 2012
Q Q1 20 013
Q3 2013
Q1 2014
Q3 2014
Q1 2015
Q3 2015
Source: Thomson Reuters D Datastream
nst deflation n is ongoing Japan’’s war again The BoJ J’s war against deflation has not n yet come to o an end. In Jaanuary 2013, th he BoJ said it wanted to t lift inflation to o 2% within tw wo years. The problem p is that the BoJ’s tradiitional inflation measure e, has been ne egative in the pa ast three months (average -00.1%) and there e is growing uncertainty as to wheth her Japan can meet its2% go oal. This, despitte the ongoing QQE and the central bank’s b commitm ment to continu ue with QQE as s long as necesssary to mainta ain this target. The BoJ J has responde ed by delaying the timing for reaching r the infflation target to o the second ha alf of FY 20 016. It has also o introduced a new n preferred measure of inflflation, which excludes food and a energy. This core-core e inflation has been b slowly rising, but we exppect it to only move m closer to the et in 2017. Clea arly, this justifie es additional monetary m easingg. 2% targe
Wage growth g slow wer than exp pected One of the factors that continues to hold h down inflattion is modest wage growth, despite the reccord and low unemp ployment rates.. Wage growth for full time em mployment hass high corporate profits a
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Global Ou utlook – 25 November 2015 2
been slo ow, while growtth of wages forr part-time emp ployment has bbeen higher. Th he BoJ explainss this discrepancy by ind dicating that firm ms are trying to o meet the incrrease in labourr demand by hiring fewer regular workers u until the recove ery becomes firm. On top of tthis, the govern nment is likely to e corporate taxx in 2016, hoping that the tax savings will enncourage firms s to further lower the increase e wage growth.. We think thatt actions such as a this will suppport investmen nt and wage growth in n 2016. Mr Kurroda has said that t he will be watching w wagee growth closely after the 2016 spring ne egotiations. Th his will be the most m likely trigg ger for additionaal easing in 20 016.
Exportt growth rem mains disappointing The strong depreciatio on of the yen is one of the most visible outcoomes of the Bo oJ’s QQE program mme. However, this has not giiven export gro owth the expect cted impulse. Ja apanese firms have bee en expanding a abroad and according to IMF estimates, aroound 25% of to otal manufacturring is produc ced by Japane ese firms outsid de the country. On top of this,, lacklustre global trade and the t moderatte growth in Ch hina have also been suppress sing export groowth. Since the start of the year, exports to t China have dropped considerably, mainly y in the area off chemical prod ducts, businesss machine ery, transportattion equipment and metal products, which aare closely relatted to the slowdow wn in China’s in ndustrial sectorr. We think thatt global growthh will show som me improvemen nt next yea ar, which will be enefit Japan’s foreign f demand.
Yen depreciation has nott boosted exp port growth index
China C is an im mportant tradiing partner fo or Japan % yoy
120
60 70 80 90 100 110 120 130
110 100 90 80 70
deprecciation
60 00
0 02
05
07
10
12
15
% of total exports
2 20 1 16 1 12 8 4 0 US
Jaapan export volum me (lhs)
Chiina
EU
S. wan Other Other Hong Taiw Korrea Kong Asia
Jaapan real effectivee exchange rate (rrhs inverted) Source: S Thomson R Reuters Datastrea am
Sou urce: Thomson Re euters Datastream m
Additio onal moneta ary easing may m not be enough e The dive ergence in mon netary policy ac cross central banks, will leavee its mark on th he yen. The ye en will likely y weaken due tto the Fed’s mo onetary tighten ning. At the sam me time, it will strengthen against the t euro as we e expect more monetary m easin ng from the EC CB. Given that we anticipate the t US rate hike cycle to b be one of the weakest, w we still expect the BooJ to ease furth her in 2016, like ely t spring wage e negotiations.. This will give the economy, aand particularly inflation, an around the additiona al impulse. How wever, there are a number off concerns. Thee government has h been cautiious depreciation, which about the pace of yen d w has been n putting pressuure on food priices and this co ould onsumer sentim ment. Moreover, the expansio on of QQE is noot unlimited. Th he slower pace e of affect co selling of o bond holding s among pension funds and insurers placess restrictions on the BoJ’s bo ond purchase e programme. As a result, altthough our bas se scenario is ffor additional QQE, Q we think that t negative e interest rates are a growing possibility. However, it is likeely that moneta ary policy alone e will not be b able to lift th he economy. We W hence expec ct it to be compplemented with h some fiscal stimulus s.
Fiscal policy to th e rescue Given Ja apan’s weak fisscal position, th he contribution of fiscal policyy to growth in recent years ha as been me eagre. Indeed, government co onsumption ha as added very l ittle to GDP growth in the passt
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Global Ou utlook – 25 November 2015 2
quarter. Japan’s debt-tto-GDP ratio re emains high, bu ut the governm ment’s borrowin ng costs continu ue to be low w. Looking ahe ead, we think th here will be a more m proactive fiscal policy in 2016, which will w likely go hand in hand w with monetary policy easing. This should giive some boost to economic necessary cond ditions for the consumption c taax increase pla anned for April activity, providing the n his tax hike in any way resem mble those of thhe previous hik ke, the effects will w 2017. If the results of th ere will probab bly be a decline e in demand theereafter. If Japan makes good d be front--loaded and the on this commitment, c grrowth should slow down again in 2017.
More and a deeper s structural re eforms need ded Of the th hree arrows of A Abenomics, the expansion off QQE has beeen effective in boosting b the Japanes se stock marke et and the yen’s s depreciation. In contrast, theere is little to see from the fiscal stimulus s arrow. Fiscal policy has been at best neutrral after the impplementation of o the consumption tax hike.. As mentioned d above this co ould change. Meanwhile, proggress made in the t third arrow,, which includes structurral reforms, has been insufficient to convincce households and companies to S far, reforms have been passed to make the t farming inddustry more dyn namic, to spend. So liberalise e Japan’s electtricity market, to t provide companies better ggovernance, an nd to foster trad de (Transpa acific Trade Pa act). It will take some time beffore implementtation of this Pa act, but it will give g the services industry m more access to foreign markets. Other meassures aimed at tackling aphic problemss, including a higher h female la abour participaation, lifetime employment at demogra large firm ms and immigra ration, remain a challenge.
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