Bolstering Japan’s growth credentials

Nadya Mihaylova - 17 August 2017

Japan’s economy is much maligned: its painful progress over the past 25 years has engendered deep distrust in its political leadership in the realm of economic policy. Yet, in summer 2017, it is the upbeat economic news that could revive Abe’s plunging approval ratings (figure 1), following a series of political scandals. Preliminary data for the April-June quarter registered an annualised improvement of 4 per cent in GDP, 3.7 per cent in private consumption and 9.9 per cent in capital expenditure. While subsequent revisions may take the edge off the strong readings, the sequential improvement in Japan’s real output and expenditure is a cause for celebration.

Abe’s growth-focused domestic policies have finally translated into additional household spending, with some of the fastest gains seen in home appliances and automobiles. The increase in household consumption boosted headline growth by 0.5 percentage points (figure 2). It appears that Abe’s structural reforms, which encourage employers to compensate all employees equally for doing similar work, have paid off. With an unemployment rate of 2.8% and a rising vacancy to applicant ratio, the tightness in the labour market is forcing up wages, especially for part-time employees. According to the “Wage and Hours worked” survey, the hourly wages for part time workers rose by 3.1% YoY in June, the fastest pace since mid-2008.

Strong corporate profits and stock market performance have also boosted confidence, with a positive knock-on effect on investment growth, especially in industries such as construction, machinery, and information services. Investment linked to the Tokyo 2020 Olympic Games is also providing a boost to growth and could trigger even more spending on Japan’s aging infrastructure. Preparations for the Games are well underway, with many major firms accelerating their development projects. Plans seek to minimise travelling times and to build new facilities to house athletes and host events.

The increase in domestic demand has also translated into higher imports of oil and natural gas, while net exports marked the first negative contribution to GDP in six quarters. The component subtracted 0.3 percentage points from real GDP growth, partly due to lower smart phone demand from China. However, external demand is expected to strengthen, despite the recent weakness in the latest figures. The Japanese government has shifted its focus towards major infrastructure projects abroad boosting Japanese construction and engineering companies exporting high-tech expertise. The goal is to become a world leader and export 30 trillion Yen (US$268 billion) worth of infrastructure packages by 2020. The plan seeks to secure more infrastructure exports covering all stages of development, mainly focusing on electricity, high speed railways and telecommunications projects.

In terms of global trade, Japan has also recently signed the third-largest trading agreement with the European Union, with surveys indicating that almost 50 per cents of the companies believe that the removal of tariffs will benefit their operations. This will provide an additional benefit to Japan’s traditionally strong export markets. Time to take a closer look at the Japan growth story.

Source: Japan Macro Advisors

Data Source: CEIC

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