Japan Watch
GDP growth revised down
Group Economics
Macro & Financial Markets Research
Maritza Cabezas +31 20 343 5618
Roy Teo +65 6597 8616
29 October 2014
•
We are revising our GDP growth forecast to 1% from 1.5% in FY 2014 as a result of disappointing economic data in the
past months. We maintain our GDP growth of 1.4% for FY 2015.
•
Our inflation forecast (without VAT impact) is 1.3% in 2014, which combines the upside of monetary easing and downside
of lower oil prices. Inflation should increase modestly to 1.6% in 2015.
•
At the end of 2014, we expect the BoJ will announce an expansion of quantitative and qualitative easing, while stronger
wage growth should lift consumption growth next year.
•
The yen is projected to decline to 115 and 125 against the USD by the end of 2014 and 2015 respectively.
Effect consumption tax larger than expected…
Going forward we think that trends in consumption will be
The consumption tax has had a far greater impact on Japan’s
supported by lower food and energy prices. However, the key
real economy than anyone anticipated. Real GDP shrank 7.1%
will be whether we see improvements in the wage and
qoq in April-June, exceeding the 6.6% expansion in the first
employment situation. In Japan, the shift to non-regular
quarter. Consumption had been performing fairly well before
employees is a key factor in basic wage sluggishness, since
the tax hike and in fact it was one of the main drivers of the
this has held down fixed costs such as welfare and social
recovery. But consumption expenditure saw a large drop in
insurance in addition to wage levels. Lately there has been
April-June of 19% on an annualized quarter on quarter basis.
some improvement in wage growth and it will be further helped
Even after soothing the fluctuations of the tax hike,
by the reforms to reduce labour duality (regular vs temporary
consumption in the period January-June 2014 compared to the
workers). This refers to It is also the case that before the VAT
same period a year before declined by 0.8%. Going into the
hike, new job offers and overtime work hours were trending up.
third quarter, August and September’s consumption data has
We expect the labour market reforms to gain traction in 2015.
been mixed. The real private consumption index of the Cabinet
based consumption increased by 0.4% mom in August after a
…while export growth still weak despite yen depreciation
The effects of a weaker yen on export growth have been
fall of 0.5% the previous month. Meanwhile, retail sales
disappointing. Authorities anticipated that a weaker yen would
Office, the most accurate indicator to track quarterly GDP
recovered
in
September
confirming
stronger
private
fuel export volume, improve corporate earnings, increase fixed
investment and wage growth. But so far the weaker yen has
consumption ahead.
not managed to revive export volumes. But the fall of the yen
has expanded firm’s margins and likely boosted the earnings
GDP growth shows weaker consumption
of export firms. In the past, there was a strong link between the
% yoy
real effective exchange rate and the export volume index, with
10
volume rising as the yen weakened. On the one hand,
5
structural issues could be behind the weaker exports. Japan’s
car manufacturers are, for instance, have moved their auto
0
production overseas, resulting in weaker exports to the US. On
-5
Investment
Government consumption
Inventories
Net exports
Private consumption
GDP growth
-10
-15
the other hand, but to a lesser extent a moderate global
economy has capped export demand. We expect that external
demand will recover robustly in 2015 on the back of a stronger
global economy.
-20
Q1 2012
Q4 2012
Q3 2013
Source: Thomson Reuters Datastream
Q2 2014
2
GDP growth revised down – 29 October 2014
The outlook
Exports slow growth despite weaker yen
Japan’s authorities need to maintain the reform momentum,
while ensuring that further monetary easing is on the cards.
index
The consumption tax rate hike is now a topic of debate, but
120
70
110
80
100
90
community that Japan is serious about fiscal consolidation. We
90
100
think that this measure or an equivalent will be announced at
110
the end of this year and we expect this measure to be
120
implemented at the end of 2015. Meanwhile the effects of a
130
weaker yen are not having the intended impact, but lower oil
80
70
depreciation
60
00
02
04
06
08
10
12
14
this is basically seen as a goodwill sign for the international
prices will help consumption with the increase in disposable
Japan export volume (lhs)
income.
Japan real effective exchange rate (rhs inverted)
Moreover, at the end of 2014, we expect the BoJ will announce
Source: Thomson Reuters Datastream
an expansion of Quantitative and Qualitative Easing (QQE). In
any case, we are revising our GDP growth forecast to 1% from
Fixed investment remains supportive to growth
Business fixed investment has been moderately increasing.
Machinery orders, a leading indicator of machinery investment
fell back somewhat in the second quarter. Meanwhile
construction starts, a leading indicator of construction has
1.5% in 2014. In 2015 we maintain our GDP growth of 1.4%.
As for inflation, we forecast 1.3% in 2014 (CPI ex food and
without VAT impact) as a result of the lower energy prices. We
expect inflation to pick up slightly in 2015 as a result of higher
wages. Finally, we expect the BoJ in its 31 October Monetary
been more or less flat. The positive note is that corporate
Policy Meeting in which it presents the semi-annual Outlook
profits have continued to improve. Business sentiment has
Report to cut its GDP forecasts, while the commitment to
generally stayed at a favourable level.
achieve the 2% inflation target by mid-FY will be maintained,
despite the downside risks to the price outlook.
Tankan business sentiment large firms positive
Key forecasts for the economy of Japan (*)
% yoy
40
GDP (% yoy)
CPI inflation ex-food (average % yoy)
without VAT impact
20
0
-20
Budget balance (% GDP)
Government debt (% GDP)
Current account (% GDP)
-40
-60
-80
06
07
08
09
10
11
12
13
14
Source: Thomson Reuters Datastream
Unemployment (%)
10Y rate (% end of period)
USD/YEN (eop)
2013
1.5
0.3
0.3
2014e
1.0
3.3
1.3
2015e
1.4
2.6
1.6
-8.3
244
0.7
-7.0
244
0.1
-5.9
242
0.3
4.0
3.7
3.6
0.6
105
0.5
115
1.1
125
(*) data corresponds to FY April-March
Implications for the Japanese yen
Budget b alance, current acc. for 2014 and 2015 are rounded figures
We expect the yen to decline to 115 by the end of this year.
Source: ABN AMRO Group Economics
The consensus is that the BoJ will implement more stimulus
only in early 2015. Hence the surprise element of BoJ moving
will exert further downward pressure on the yen. Furthermore
the market is underestimating the pace of rate hikes in the US
next year. We think that further adjustment in short term yields
in the US will materialise in the coming months. As interest
rate differentials between US and Japan widen, the US dollar
is expected to continue its outperformance against the yen.
We expect the JPY to decline to 125 against the USD in 2015.
3
GDP growth revised down – 29 October 2014
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