As expected, the Cabinet Office revised down GDP growth for 2013 Q4 to 0.2% (or 0.7% annualised) from 0.3% in the first preliminary estimate. This is still above potential growth, estimated at 0.3% annualised, pointing to a further diminishing of idle capacity.
The economy slowed markedly in the second half of 2013 with quarterly growth averaging only 0.2% compared with 1% in the first half of the year. The main reason is the decline in exports (-0.1% in both Q3 and Q4), even though world trade has been picking up.
Japan failed to profit from this upturn. This is partly due to continuing political problems with China. Moreover, the boost in domestic demand, related to the three-point VAT hike in April, has led to capacity shortages in some sectors. Manufacturers have responded by raising export prices, also partly in response to higher primary commodity prices.
The Economy Watchers have become have become increasingly worried about the likely contraction after the VAT hike. The overall diffusion index for future economic conditions is well below the 50 mark that separates expansion from contraction. The index for companies mainly dealing with households even lost 10 points in February.
An additional factor is the current spring wage round. Against the backdrop of a tightening labour market and the looming April VAT hike, workers are pressing for higher wages. This should stimulate domestic demand and push inflation higher, a major objective of the government’s policy. Large manufacturers have shown willingness to raise wages. However, the situation is more worrisome for small companies mainly operating in the domestic market as they have limited possibilities to pass on higher production costs in sales prices.
We expect the economy to contract sharply after the VAT hike in April (-1%). Economic growth could slow in 2014 to around 1% compared with 1.5% in 2013.
BY Raymond VAN DER PUTTEN
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