Four straight quarters of Japanese growth – it’s been a while

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Japanese growth tends to be quite volatile and given the relatively low trend growth, registering four straight quarters of growth is quite an achievement.

The Japanese economy grew by 1.2% quarter-on-quarter (QoQ), annualised in the fourth quarter of 2016.

Over the whole of 2016, Japan’s GDP grew by 1.0%, which is slightly faster than the pace at which the Japanese economy can grow in the longer term given a declining working age population and modest productivity growth (see Exhibit 1).

The last time Japan’s GDP growth was this strong was in 2009/10 when the economy was recovering from the Great Financial Crisis. GDP growth accelerated  from 0.4% YoY in the first quarter of 2016 to 1.7% YoY in the fourth quarter. Before becoming too enthusiastic, we should note that annual growth was last at 3% (YoY) in the third quarter of 2013 and last at above 2% (YoY) in the third quarter of 2015. After those peaks, growth slipped. One main caveat: initial Japanese GDP data can be revised significantly.

Exhibit 1: Japanese GDP grew by 1.0% in 2016, the first time since the recovery from the financial crisis in 2009/10. The graph shows changes in Japanese GDP between 2011 and 2016.

japanese growthSource: Datastream, BNP Paribas Asset Management, as of 13 February 2017

Diverse growth drivers in Japan

The latest GDP data clearly shows the tug of war between domestic and external forces we have highlighted before. Yes, the labour market looks tight looking at the 3.1% unemployment rate in December and with the job-to-applicants ratio at its highest level since the early 1990s. However, this tightness has generated hardly any wage gains. Wages rose by 0.1% YoY in December, but due to rising inflation real wages fell by 0.4% (see Exhibit 2 below). With some growth in employment, total household income is growing, but in the fourth quarter consumers decided not to spend this extra income. Consumption growth was zero.

Exhibit 2: While nominal wages rose by 0.1% YoY in December, rising inflation meant that real wages fell by 0.4%  

japanese growthSource: Bloomberg, BNP Paribas Asset Management, as of 13 February 2017

Growth was supported by net trade as exports rose by 11.0% QoQ annualised and imports by 5.4%. Business investment was also positive, but residential investment growth virtually halted after strong gains. The Japanese yen has strengthened lately, but this was a small move compared with the big swings seen in recent years. The yen is now stronger than in 2015, but still significantly weaker than in previous years. Anyway, the inflationary impact of this yen strength should fade.

In the fourth quarter the GDP deflator – the broadest price gauge of any economy – was down by 0.1% YoY. But inflation was supposed to be positive, right? Well, only if it is demand-pull inflation, or inflation driven by economic growth and a closing output gap. Cost-push inflation from higher oil prices or a weaker yen will curb consumer spending power. Anyway, with some income growth, stronger producer sentiment and fiscal support, the Japanese economy should be able to grow at or slightly above trend this year.

Exhibit 3: Japanese yen per US dollar and effective exchange rate

japanese growth

Source: Bank of Japan, as of 13 February 2017

Will this make a difference for the Bank of Japan? Probably not for the time being. The GDP deflator shows that there are hardly any inflationary pressures. Core consumer price inflation slipped to -0.1% in December. At the end of January, the BoJ decided to keep monetary policy unchanged, leaving the policy rate at -0.1% and the target for the 10-year yield at zero. Two out of nine policymakers voted for higher rates. The 10-year yield has drifted towards 0.1% and this has coincided with a stronger yen. Thus, the BoJ may have to increase its asset purchases to stay credible.


This is an extract from the Weekly Strategy Update written on 13 February 2017 by chief economist Joost van Leenders and CIO, head of TAA Colin Graham.

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