Economics

Schroders Quickview: Japan GDP figures flatter to deceive

The Japanese economy continues to struggle to regain momentum. We expect today’s GDP figures will result in a delay to the next consumption tax hike.

18/05/2016

Keith Wade

Keith Wade

Chief Economist & Strategist

On the face of it, the Japanese economy rebounded in Q1 with a gain in GDP of 1.7% (annualised) after a drop in output at the end of last year.

However, whilst it is good news that the economy avoided the recession some had feared, the figures were boosted by an extra spending day as a result of the leap year. Adjusting for this takes growth down to a 0.5% annual rate which still avoids recession but leaves activity at a lower level than was seen in Q3 last year.

Malaise persists

From this perspective, the malaise that hit Japan after the increase in consumption tax in 2014 persists. Whilst the weakness of global trade and particularly the slowdown in China has not helped, the economy continues to struggle to regain momentum.

There are strong rumours that Prime Minister Abe is looking to postpone the next hike in the consumption tax scheduled for April next year. We expect today’s figures to tip the decision in favour of delay, in order to avoid hitting the economy with another round of fiscal tightening.

G7 approaches

It is likely that such a decision will be announced at the forthcoming G7 meeting. Japan is hosting the event and is keen to promote a coordinated push on fiscal policy given the constraints on monetary policy, and is also set to boost fiscal spending in coming months.

Delaying the consumption hike would reinforce its own commitment to the cause, although we doubt others will follow.

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.