“Japan is partying like it’s 1989. Longest period of consecutive economic growth since then. Sake all round!”
The somewhat satirical tweet from AFP’s Japan news editor, Richard Carter, followed the release of data Wednesday confirming the world’s third-largest economy is now on its longest growth spurt since the heady days of the 1980s bubble economy.
Japan’s economy expanded at an annualized rate of 0.5 percent in the December quarter 2017, marking its eighth successive quarterly gain. The last time the Land of the Rising Sun enjoyed such economic sunshine was in the late 1980s, when it racked up 12 consecutive quarters of growth between 1986 and 1989.
Yet despite the attractive Valentine’s Day release, economists were far from head over heels in love with the numbers.
A median estimate of private-sector economists by Nikkei Quick News had predicted a gain nearly twice as large, of an annualized 0.9 percent. The quarterly increase of just 0.1 percent was also weaker than the 0.6 percent gains achieved in the previous two quarters.
“The overall impression of the October-December performance was a weak one,” Mizuho Securities senior market economist Toru Suehiro told the Nikkei.
Suehiro told the Japanese financial daily that this year’s GDP growth would “not strengthen inflationary pressure,” making it likely that the Bank of Japan (BoJ) would continue its quantitative easing (QE) policy.
Capital Economics’ senior Japan economist, Marcel Thieliant, said the economy “won’t expand as strongly this year as it did in 2017.”
On the positive side, the latest GDP data showed Japanese consumers are spending again. Consumer spending rebounded, rising by 0.5 percent in its first increase in six months, helped by extra spending on mobile phones, cars and food.
Nonresidential investment also posted its fifth consecutive rise, up 0.7 percent on the previous quarter, as production increased and also related demand for machinery.
However, private housing shrank for the second straight quarter along with public investment, while external demand also had a negative impact on GDP as imports exceeded exports. Nominal GDP decreased by 0.1 percent on an annualized basis, its first decline since the September 2016 quarter.
Nevertheless, London-based Capital Economics pointed to “robust growth in labor income” that should see consumer spending continue to expand, in the long sought-after “virtuous cycle.” Employee compensation grew by 1.2 percent in real terms, helped by strong job growth.
Yet Thieliant suggested that Japan’s economy was running into capacity constraints following its earlier gains.
“We estimate that output was around 0.5 percent above its sustainable level last quarter. Over the last two decades, GDP has never risen by more than 1 percent over the coming year when capacity shortages were as pronounced as they are now,” he said.
Capital Economics expects the national economy to expand by 1.2 percent this year, which, while positive, would be slower than last year’s 1.6 percent increase.
More worryingly for Tokyo, such a gain would be unlikely to give the economy sufficient velocity to withstand a planned hike in the consumption tax rate, which is set to rise to 10 percent from the current 8 percent in October 2019.
Japan “bull” Jesper Koll, chief executive of WisdomTree Japan, said the data confirmed “there is no room for complacency for ‘Team Abe’ and the BoJ. Specifically, the housing bust and savings boom point to both cyclical and structural challenges.”
Tokyo-based Koll pointed to robust private spending and business investment as aiding the economy, with the prospect for further gains from planned targeted tax cuts for wage growth and investment spending.
Public demand should also increase following the recent passage of an extra spending budget through the Diet, while an upturn in the U.S. economy and continued growth in Chinese and Asian investment spending bode well for Japanese exports.
However, Koll suggested “Abenomics” would have to consider potential deregulatory and tax incentives to restart the housing market, amid a downturn in the residential investment cycle.
The data also showed a flat GDP deflator, which together with the latest consumer price data suggest the central bank “is a long way away from achieving its target of a ‘sustained 2 percent inflation overshoot,’” Koll said.
“The BoJ has no smoking gun and, with the cyclical worries over the housing market compounded by yen appreciation, the ‘gun’ appears to have been taken off the stage again,” he said.
Koll also noted that Japan’s savings rate was rising again, with workers’ compensation exceeding consumer spending. Since the start of Abenomics at the end of 2012, workers’ compensation has risen by 23.7 trillion Japanese yen ($221 billion) but consumer spending by only 14.6 trillion yen, a positive savings gap of almost 2 percent of GDP, he noted.
“Make no mistake – the good news is that, yes, for the first time since basically 1995/96, nominal incomes are now rising consistently; but Japanese households are still reluctant to use their newfound purchasing power,” he said.
“For ‘Team Abe’ this hints at a major structural challenge: the surge in the fiscal deficit and the uncertainty over Japan’s social security may be forcing households to build-up further precautionary balances. Unless credible fiscal and social security reform can be enacted, this rise in the household savings rate is poised to stay a drag on domestic demand.”
The GDP data together with below-par inflation point to a continuation of QE, despite rising interest rates in North America and expectations of the start of policy “normalization” by the BoJ this year.
With media reports pointing to the reappointment of BoJ governor Haruhiko Kuroda for a second five-year term from April, the central bank is unlikely to waiver from the pursuit of its 2 percent inflation target, despite signs of an end to deflation.
For Japanese Prime Minister Shinzo Abe, getting the economy firing on all cylinders will be crucial should he wish to avoid another recession next year in the lead up to the 2020 Tokyo Olympics. Previous hikes to the consumption tax have resulted in consumers and businesses spending big beforehand but going on strike afterwards, dragging the economy downwards.
The days of partygoers chasing taxi drivers with 10,000 yen notes, gold-flaked sushi being served at restaurants, and Tokyo’s Imperial Palace being valued at more than the entire state of California, appear long gone.
Yet with a stronger world economy expected in 2018, along with rising interest rates in the United States and elsewhere, exports may yet come to the rescue, aided by Japan’s free trade deals with Asia and Europe.
It might not be 1989, but better pass that sake bottle around as the party for Japan is far from over.