Quickview: What does Japan’s return to growth mean for QE?
Japan emerged from recession in the fourth quarter of 2014. Despite this, we could still see further policy easing from the Bank of Japan
The latest GDP release showed the Japanese economy expanded by 0.6% over the quarter (an annualised gain of 2.2%) after two consecutive quarters of negative growth following the hike in the consumption tax which weighed on activity. While this is good news, markets had been looking for a stronger gain so there was a degree of disappointment and some head scratching given monthly data released during the quarter had pointed to a stronger outcome.
Consumer spending grew, but by only 0.3% on the quarter, while housing and capital spending remained lacklustre. The bright spot was export growth which gained 2.7% on the quarter (not annualised) such that net exports added just under half the gain in GDP. We would see the competitiveness of the Japanese yen as playing a role in this, as it is difficult to identify much in the way of stronger external demand during the period.
Rising output indicates that further stimulus is not required; however, lower inflation suggests the opposite.
Going forward, we expect trade to remain a positive as Japanese firms gain market share in global export markets, but for a more robust recovery we need to see better domestic demand. Many are pessimistic on this, but the fall in the oil price will feed through into lower inflation and alongside continued gains in worker pay (the report confirmed another gain in employee compensation), this should translate into stronger real income and spending growth. Investment will probably take longer to turn as it tends to lag rather than lead growth.
Overall, we remain positive on the outlook for Japan this year. The difficult question is where this will leave the Bank of Japan’s (BoJ) quantitative easing programme. Rising output indicates that further stimulus is not required; however, lower inflation suggests the opposite, given the authorities’ 2% target. Should the BoJ see the fall in inflation as purely a function of lower oil prices, in the same way as the US Federal Reserve and Bank of England do, then we are unlikely to see further action in 2015. Alternatively, if they take an European Central Bank-style approach and focus on the headline rate (which includes all elements of inflation) rather than the core rate (which excludes food and energy), further easing of policy is in the offing.