Back Into The Limelight

Since the beginning of the year, GDP growth has accelerated to about 1% q/q on the back of very loose monetary conditions and fiscal policy. Monetary policy is likely to remain accommodative, but the fiscal stance could become neutral as the VAT hike in April is assumed to be compensated by a fiscal stimulus. Consumer spending is likely to contract after the VAT hike, and exports will take over as main engine for growth. Inflation will inch up steadily, although remaining well below the Bank of Japan’s 2% objective.

Running at full speed
Growth accelerated to an annualized rate of 4% in the first half of the year, as the change in direction in economic policy boosted household and business confidence. Households stepped up consumption on improved employment prospects, increased bonuses and wealth effects associated with the strong rise of the Tokyo stock exchange. Equity prices increased on the sharp depreciation of the yen, which gave a boost to the exporting industries. Moreover, household might have advanced purchases on the prospect of a 3-point VAT hike in April 2014. Both in the first and second quarter, private consumption contributed 2 points to the annualised growth rate.

Overseas demand was the other main engine for growth. Exporting firms profited from the weaker yen to regain market share and to improve their profit margins. However, the ongoing political tensions with China and the easing of world trade has been clearly weighing on the sector’s performance. In the second quarter, net trade only contributed 0.7 point to annualized growth after 1.6 points in the first.

Companies have been slow to step up capital spending in response to the increase in demand. Many firms have actually substantial overcapacity or have been relocating certain low value-added activities. In the second quarter, investment increased by 1.3% from the previous quarter in particular due to the construction and real estate sectors.

The surge in activity has resulted in a tightening of the labour market. In July, the unemployment rate edged down to 3.8%. However, this has not been translated into pay increases at the macroeconomic level. However, bonuses have been rising. In July, wages, including bonuses, were virtually unchanged from a year earlier, whereas prices rose by 0.7% y/y, mainly due to higher energy costs. This might be the reason that consumer confidence and the willingness to buy has been weakening.

BY Raymond VAN DER PUTTEN

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