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Japanese Economy shows some improvement

Abenomics

Japan’s economic performance is moving in the correct direction as the lately issued Cabinet data on coincident and leading indexes showed an uptick.  Coincident Index, which delineates the current state of economic activity was marginally up by 0.1 from the previous reading of 115.1.  Similarly, the leading index, a yardstick to predict changes in the economy by evaluating economic factors that change before hand, was also up to 105.2 from the previous reading of 102.6.  Japan’s annual GDP growth rate was lower than expectation, growing at an attenuated rate of 1% as it slowed down to 0.2% during the last quarter, which was the most sluggish for the year after having peaked at 0.6% during the 1st quarter of 2016.  Perhaps this growth rate, resulting in reduced demand of machinery, was due to subdued demand emanating out of China owing to  its own growth retardation.  Adding to this, Japan’s reliance on trade does not need underscoring as data for 2016 exhibits that overseas trade accounted for half of the GDP growth rate.  This, however, does leave the economy exposed to imposition of barriers to trade, in the backdrop of the rhetoric emerging from the Trump led administration.  While governmental fiscal measures are expected to support growth, but there are upside limitations given Japan’s growths dependence on external demand and with US as the 2nd largest trading partner after China, a call for protectionism is not a welcomed sign for Japanese economy.  Thus the onus of Abe led government is to show that the government is trying to shore up the economy by implementing a sustainable fiscal strategy.

While international trade has been the mainstay of the Japanese economy, the common theme by many analysts is that domestic consumption has to pick up to alleviate the economy from its anemic growth rate.  Wages are rising ever so slowly even though labor market conditions do not exhibit any slack and there is optimism in this regard.  Some economists see the economy reaching full employment levels during the current year, which would allow wage growth rate achievement of 1.4%  and then continue charting to 2% by 2018.  This could be a catalyst to accelerate domestic demand and the signs have been encouraging as shown by the addition of 510,000 regular positions added by companies during last year.  This is a pace fastest in over a decade.  Also with economy potentially reaching full employment levels real wage rates would nudge upwards, which would correlate well with price levels appreciation in an economy that is gripped in a deflationary cycle.  While most economists think that structural reforms are the way forward, however, Japan could witness a growth rate transpiring at the fastest rate since 2013, allowing for GDP to reach 2% if the consumption function is properly activated via improved wage growth rates.  It must be borne to mind that stimulus package introduced by Shinzo Abe’s has increased the GDP to debt ratio to soaring and unsustainable heights at 247% and is the highest for any developed nation.  Investors would have loved at this time for the government to have shown greater fiscal discipline, and possibly enforce another tax hike.  Yet, last time when it was introduced consumer-spending plummeted and economic contraction followed.  Drop in consumption after sales tax hike in JapanIt would thus be interesting to note how much further the government is willing to go with its stimulus plan as an inflection point in terms of wage growth rate may be nearing, while the target growth rate remains a distant possibility.

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