Japan entered a technical recession in H2 2023. The first estimate of Q4 GDP indicates a modest contraction of -0.1% q/q following a more significant downturn of -0.8% q/q in the previous quarter. More symbolically, Japan lost its ranking as the world's third largest economy (in nominal GDP) to Germany. Nevertheless, the strength of economic activity in H1 2023 had given the Japanese economy a significant growth carry-over, allowing the average annual growth rate to reach +1 [...]
Faced with a natural disaster and a political crisis, 2024 is off to a rocky start for Japan. However, the economic impacts of the earthquake that struck the country’s west coast on 1st January 2024 are expected to be fairly limited due to the authorities’ effective preparations and quick response in dealing with this type of event. After an expected growth of +0.4% q/q in the fourth quarter of 2023, activity should slow in the first quarter of 2024, although it will remain positive at 0.2% q/q [...]
The Bank of Japan’s latest Tankan survey, published in December, highlights the country’s significant labour shortages and recruitment challenges. These are affecting all sectors and are even reaching record levels in almost a quarter of them. In order to facilitate the interpretation, the data in this table are converted in Z-score, which measures the number of standard deviations separating each index from its long-term average (1974-2023 period).
The revision of Japanese growth figures was unfavourable, resulting in a greater decline in GDP in Q3 than initially estimated (-0.7% q/q versus -0.5% q/q). The downward adjustment is largely due to greater destocking: the negative contribution was increased from -0.3 percentage points (pp) to -0.5 pp. Other significant revisions came from residential investment (from -0.1% q/q to -0.5% q/q), private consumption (0.0% q/q to -0.2% q/q) and public investment (-0.5% q/q to -0.8% q/q) [...]
The preliminary GDP estimate for Q3 shows a contraction of -0.5% q/q, while the most recent economic surveys have confirmed the slowdown in activity. The composite PMI fell 1.6 points in October, but remained in expansionary territory, standing at 50.5. This deterioration is due to the decline in the services PMI, which was down by 2.2 points (51.6 compared to 53.8 in September). The manufacturing PMI stabilised in contraction zone at 48.7.
Monetary policy desynchronization between the Federal Reserve and the Bank of Japan (BoJ) has become huge. This has caused a significant weakening of the yen. Higher US yields have also exerted upward pressure on JGB yields, which in turn has forced a gradual adjustment of the BoJ yield curve control policy (YCC). Inflation developments in Japan increase the likelihood of a policy rate increase but policy normalization is a delicate task for domestic reasons as well as international spillovers [...]
Japanese economic surveys are sending out mixed signals. On the positive side, the business condition index from the Tankan survey improved from 8 in Q2 to 10 in Q3, driven by services: business confidence in the sector was the highest since 1991. The PMI for services is also proving resilient. Although down 0.5 points in September, it remains in expansionary territory at 53.8 [...]
In recent decades, Japanese companies have extended significantly their activity abroad. According to the Ministry of Industry data, a quarter (25.8%) of the total turnover of Japanese manufacturers is now coming overseas subsidiaries.
After sustained growth in H1 2023, driven by external demand, the Japanese economy is beginning to slow down. Private demand (household consumption, corporate investment) is offering little support for growth. Although inflation has stabilised at around 3%, it is eroding household purchasing power, which is still not benefitting from significant wage increases. Nevertheless, according to the Ministry of Finance data, corporate profits hit a new record in Q2 [...]
Japanese economic surveys remain positive overall, despite contrasting results for August: the composite PMI was up 0.4 points to 52.6, while the Economy Watchers Survey fell by 0.8 points, returning to its June level of 53.6.
The Japanese economy continued its post-pandemic recovery in May and June, although this remains fragile. According to the final estimate for May, industrial production contracted by 2.2% m/m but increased by 4.2% year-on-year. At the same time, activity in the tertiary sector grew by 1.2% m/m and 1.8% y/y. The latest PMI survey also indicates that economic activity expanded in June (composite index in expansion at 52) [...]
After inflation, would it be the turn of wages to change gear in Japan? The report published by the Ministry of Health, Labour and Welfare on July 7th shows indeed a notable increase in (scheduled) base wages in May, up 1.0% m/m, the largest monthly increase since the start of current statistics in 1990.
Inflation in Japan continues to rise, spreading to all the items in the consumer price index. Inflation expectations remain anchored around the 2% target and price increases should remain at this level in the medium term. We expect the Bank of Japan (BoJ) to raise the 10-year sovereign rate ceiling to 1% in July, before ending its yield curve control policy by the end of 2024. Real GDP grew by 0.7% q/q in Q1 (+2 [...]
Real GDP growth rose in the last two quarters in Japan, but is still slightly below 2019 levels. However, a slowdown in activity is expected from Q2 and until the end of 2023.
Japanese growth picked up again during Q1 2023, posting an increase of +0.4% q/q. However, this upturn needs to be put into perspective, as it follows two disappointing quarters (-0.2% q/q in Q3 2022 and 0.0% q/q in Q4 2022). As a result, Japanese GDP is still at the same level as in Q2 2022.
The current inflationary momentum could encourage the BoJ to reassess its yield curve control policy, or even start a tightening in monetary policy. However, the timing and size of any such adjustments are difficult to predict and may not occur before next year.
A rebound in Japanese activity is expected in the first quarter of 2023, linked to the improvement in business and household confidence surveys. The composite PMI returned above the expansion threshold in January and continued its moderate improvement, reaching 52.9 in March. Household confidence – at its highest for a year – also recovered slightly in March, but it is still very low.
With alarming inflation across the country, the new governor of the Bank of Japan (BoJ), Kazuo Ueda, will have a baptism of fire when he takes up his role. Even though price increases are expected to slow down during Q1 2023 thanks to government energy subsidies, core inflation has continued to rise this winter [...]
Japan's economic growth stalled significantly in January. Chinese New Year on 22 January likely contributed to the sharp drop in industrial production, which was down 5.3% m/m.
Surveys of Japanese services companies (Services PMI, Economy Watchers Survey) offer little visibility, having fluctuated up and down for several months. Manufacturing sector indices show a clearer trend, with gradual deterioration in activity despite the significant reduction in tensions in production chains closely linked to Japanese manufacturers. The manufacturing PMI remained below the expansion threshold in January at 48.9, having been in near constant decline for the last 10 months.
Inflation continues to weigh on consumer confidence, while a large proportion of Japanese households will see further increases in the price of electricity next March, with most suppliers having announced price increases from this month.
Confidence amongst Japanese consumers fell sharply this autumn, reflecting the difficulties they are experiencing in the face of inflation rising to its highest level for more than thirty years (3.8% y/y in October). According to the Cabinet Office, consumer confidence has fallen back to its level from the summer of 2020, when the pandemic was in full swing.
Along with the United Kingdom, Japan has had the least vigorous recovery out of all of the G7 countries during the last two years. The country even recorded a 0.3% q/q contraction in real GDP in Q3 2022, pulled down by slowing residential investments and net exports. Even though consumption expenditures grew during Q3 (+0.2% q/q), it is still well below its 2019 levels [...]
Japanese manufacturers are relying more and more on the activities of their overseas-based subsidiaries as sources of opportunities. Sales by manufacturing companies, realised by these subsidiaries, stood at 38.8 trillion JPY (299.7 billion US dollars) in the 2nd quarter of 2022, a record. This represented 28% of the total sales by Japanese manufacturing companies, when we add the sales by subsidiaries abroad to those of companies located in Japan. This percentage is also a new historic high [...]
Despite the still very severe difficulties in the automotive sector and for gas and electricity suppliers, Japanese industry is holding up. The record level of profits recorded by Japanese manufacturers in the second quarter, as reported in the Ministry of Finance’s quarterly survey, was a first significant factor. In addition, the September Tankan survey was better than expected. The general diffusion index improved by 1 point (3) compared with an expected drop of the same magnitude [...]
Japan is the world’s fourth largest economy. The country has one of the largest financial systems in the world. The country experienced remarkable growth after WW2, which ended with the bursting of the asset price bubble in the early 1990s. It was followed by a period known as the ‘lost decade’. Real economic growth dropped and inflation started to inch down, turning negative in the latter half of the 1990s. Fiscal stimulus and loose monetary policy were not successful in reviving the economy, but resulted in huge government debt.
The election of Shinzo Abe in 2012 has led to a reinforcement of loose monetary and fiscal policy to reinvigorate the economy. The so-called Abenomics strategy was built around three arrows: fiscal stimulus, a very loose monetary stance and structural reforms.
Progress on structural reforms needs to be further intensified to raise the economy’s potential growth and tackle significant demographic challenges. Progress has been made, for example, in increasing women’s participation in the workforce. However, one of Japan’s most serious structural problems is the rapidly ageing population. According to official projections, the Japanese population could shrink by over 25% in the next 40 years. This would have a significantly negative impact: in addition to negative effects on productivity and potential growth, for example a rise in the dependency ratio will reduce the tax base and limit the reduction of the primary deficit.