Does one quarter of negative growth contain ominous signs for the future of the Japanese economy?
Following eight consecutive quarters of GDP growth, the Japanese economy finally stuttered. Consensus forecasts were for the economy to contract 0.1% annualised over the first quarter of 2018, but preliminary numbers came in showing a 0.6% annualised fall. A large detractor over the period was the softening of export momentum. One of Trump's first acts as President was to abolish the Trans-Pacific Partnership agreement, giving less certainty to its ally. Over the quarter, global trade tensions escalated further, which posed a two-pronged problem for Japan's export-driven economy. Namely, these were the strengthening of the currency and the uncertainty surrounding future trade relations.
With regards to domestic trends, we saw sluggish consumer spending over the first quarter. However, this was in an environment with wages rising by 2.1% year-over-year in March and more people moving from part-time to full-time employment. To illustrate the strength of the labour market, Japan's job to applicants ratio is now the highest since the early 1970s. With employees benefitting from these trends, we expect this to feed through to further wage growth and increased consumer confidence. One factor that could weigh on the economy in the coming year is the oil price. Japan is significantly exposed, given that it is a major importer. Elevated prices will erode some consumer spending power but conversely, will help Japan towards achieving its elusive inflation objective.
Whilst Prime Minister Abe has recently been the subject of a domestic scandal which has dented his overall popularity, his reform agenda has already delivered some substantial changes. We believe that these are unlikely to be reversed in the medium term should his leadership tumble under the domestic political pressures. This is further evidence that the outlook is not as ominous as the headline growth contraction might suggest. Looking forward, we expect that the volatile export component will continue to swing quarterly growth data given the more uncertain trade environment, but feel that the domestic picture remains broadly robust.
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