Japan growth notes (H2 FY 2016)

On Japan GDP in H2 FY 2016
– The negative Q4 annualised growth figure has been reinforced by soft data we have seen so far on household consumption, flatlining wages, and uncertainty on the external demand front, not to mention the yen’s rebound in times of increased risk-aversion.
– Noting particularly on the external demand front the influence of volatility and uncertainty in Chinese growth, better-than-expected US payroll figures no longer seem enough to keep prospects for external demand uniformly upbeat.
– Amid a rather soft consumer spending backdrop, positive corporate profits are still a bright spot, but even these are surrounded by uncertainty, given the external demand picture and the yen’s rebound.
– Capex appears to have flatlined y/y (though up q/q) in late 2016, which provides additional evidence of corporate uncertainty – the latter also bodes ill for wage rises going forward.
– The yen’s rebound may be much more important now for investment income as well as corporate sentiment rather than directly influential via exports.  Corporates probably do not want to repatriate money from overseas if they feel that the yen might again weaken as risk tolerance returns.  The yen’s influence on both corporate and investor sentiment however appears very strong.
– Labour markets in and of themselves are another bright spot in the economy – the job offers to applicant ratio is the strongest it has been in 24 years (pre lost decades) and the unemployment rate appears close to or even below the natural rate of unemployment.

– The focus now should turn, to some degree, to GDP growth prospects for Q1 2016, which appear somewhat more robust so far than the prior quarter (though still on the sluggish side overall).  Most forecasters call for a Q1 growth rate of above 1% annualised.  The expectation is generally for growth to ramp up modestly until the final quarter of FY2016, whereupon front-loaded demand ahead of the 2017 tax hike is expected to occur.

On QQE-NIR
– Though negative interest rates are one way in which to push banks into lending rather than saving excess deposits, the spread of this additional liquidity to the wider economy may be limited; recall how in times of financial crisis, households withdrew money from circulation and hence “mattress savings” ballooned.  Though financial institutions in Japan are undoubtedly sounder now than in the late 90’s/early 2000’s, the precedent of withdrawals lead us to question the effectiveness going forward of incentivising risk-taking activity among households by charging banks for deposits.  Moreover, note the dearth of demand for borrowing, which might serve the damaging effect of pushing money into the hands of less responsible lenders (and creating a breeding ground for higher future defaults).

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