By Yoshinori Shigemi
The Japanese economy expanded by 1% in real terms in the fourth quarter of 2013 on a quarter-on-quarter, seasonally-adjusted basis. Domestic demand remains in good shape, growing by 3.2% in the quarter, the fourth consecutive quarter of 3%-plus growth.
In contrast to the third quarter, which was led by a substantial increase in private inventories, the fourth quarter showed strength in both private consumption (+2%) and private non-residential investment (+5.3%), partly due to last-minute demand before the 3% increase in the consumption tax rate scheduled for April this year. The other three components of domestic demand – residential investment, government consumption and public investment – continued do well in the quarter.
However, net exports contributed negatively, dropping 2.2% and pushing overall annualised growth down to 1%. Exports grew by just 1.7% (after the 2.7% contraction in the third quarter) while import growth accelerated to 14.9% (from 10.1% in the third quarter). The slower growth in exports is partly due to weaker demand in emerging countries, while continued strong growth in imports reflects the increase in energy imports due to the shutdown of nuclear power plants, as well as the increased demand for overseas mobile phones (Japan-made phones have lost popularity), electrical home appliances, and a stronger overall economic recovery.
We believe that the Japanese economy will continue to expand, helped by strong policy support, although negative growth in the second quarter appears inevitable due to the planned consumption tax increase. Additionally, later this year, the prime minster, Shinzo Abe, will decide whether to raise the consumption tax by a further 2%, from 8% to 10%, in October 2015; this decision will be central to the government’s ability to meet its target of narrowing its primary budget deficit to less than 3.3% of GDP. Given that this decision will affect Q3 data, it is expected that the government will make every effort to boost the economy in the latter half of 2014 to ensure it does not undermine growth.
The risks to the Japanese economy are not only external factors such as slower growth in the global economy, continued capital outflows from emerging market countries and supply chain disruptions caused by the extreme cold weather in US (and also Japan), but also domestic economic policy. Haruhiko Kuroda, the governor of the Bank of Japan has indicated a very positive outlook for both output and inflation. Given this, the chance of further easing, especially in April, seems to be declining, as reflected in a recent survey of market economists.
Although the government and the Ministry of Finance have directed all other ministries to execute at least 70% of the spending authorised in the supplementary budget before July to support growth, there are supply constraints due to a shortage of construction workers, building materials and heavy machines. As a result, government spending might not provide adequate support to the economy, especially in the second quarter, when we are expecting negative growth as the consumption tax rise comes into effect and last-minute demand of the first quarter is reversed.
Yoshinori Shigemi is a Japan strategist at JP Morgan Asset Management
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