The Japanese economy is the third largest in the world, behind the USA and China. Roughly 60% of Japan’s economic output is consumed by the domestic market with 40% of output exported to the rest of the world. However, the nation has had to contend with 20 or so years of deflation where falling prices stifle domestic demand as consumers delay significant purchases for as long as possible in the knowledge that they will be cheaper at a future date when the purchase is eventually made.
A major goal of the Abe administration is to inject low, positive inflation into the Japanese economy with the aim of bolstering domestic demand. A two-stage increase in sales tax was put in place by the preceding administration which was designed to provide more government income to help address costs associated with Japan’s aging population and spiralling social security costs. The first-stage increase from 5 to 8% came into effect in April 2014 with a second hike to 10% originally planned for this October. The initial increase was blamed for triggering a recession in Japan and Abe went to the electorate in December 2014 to gain approval for his “three arrows” “Abeomics” approach and for a mandate to delay the second stage of the sales tax increase.
Figures just released show that the Japanese economy grew by 0.6% in Q1, beating forecasts of 0.4% growth. On this basis, annualised growth is 2.4%, substantially above the 1.5% that had been anticipated.
Analysts are expecting that the Q2 growth figure will be weaker on the back of a pessimistic PMI reading for April and a reduction of industrial output in March by 4% over the January figure. This has led to an expectation that the Bank of Japan will engage in a further round of monetary accommodation in the autumn. Should this be the case, it is likely to cause a depreciation in the value of the Yen which is good news for exporters or any Europeans holding Yen mortgages on their homes!