Perspectives

The export sector is a source of concern

EcoPerspectives // 4th quarter 2019  
7
economic-research.bnpparibas.com  
Japan  
The export sector is a source of concern  
Japanese GDP growth was stronger than expected in early 2019. Despite the current troubles in the export sector, for the moment  
domestic demand - both public and private - is picking up the slack. In the short term, two sources of concern loom over Japan’s  
macroeconomic scenario. First, Japan is highly exposed to the slowdown in both the Chinese economy and international trade.  
Second, the VAT increase in October will curb consumption during the year-end period and possibly in 2020 as well. Faced with these  
internal and external uncertainties, Japan will maintain accommodative monetary and fiscal policies, the effectiveness of which  
remains to be seen.  
The most recent figures for Japanese economic growth were  
1
- Growth and inflation  
surprisingly strong as activity continued to expand at a relatively  
decent pace since year-end 2018. Yet two sources of concern still  
darken the horizon: the economy’s exposure to Asia and the  
behaviour of Japanese consumers faced with October’s VAT  
increase.  
GDP Growth (%)  
Inflation (%)  
Forecast  
Forecast  
1.9  
1
.2  
1
.0  
Sluggish exports  
0
.8  
0
.6  
0.6  
0
.5  
Since Q4 2018, Japanese GDP has grown at a relatively vigorous  
pace. Although quarterly growth declined, it remains relatively  
robust at 0.3% in Q2 2019, after 0.5% in Q1 2019 and 0.4% in  
Q4 2018. Like the other advanced countries, Japanese domestic  
demand picked up in H1 2019, but exports were hit by a sluggish  
environment. The economic slowdown in Europe and in the  
emerging markets, notably China, combined with the slowdown in  
world trade and the trade tensions are straining Japan’s export and  
manufacturing sectors.  
0.3  
0
.2  
-
0.1  
1
6
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
-Japanese exports and PMI  
Japanese exports to Asia (volume, %, y/y, lhs)  
Manufacturing PMI  
The latest cyclical indicators reveal a sharp and protracted  
deterioration in the manufacturing sector. For several months now,  
manufacturing PMI has held below 50, the threshold separating  
expansion from contraction (48.9 in September 2019). Meanwhile  
the services PMI is still resilient and holding at comfortable levels  
Services PMI  
2
1
1
0
5
0
5
0
5
60  
55  
50  
45  
40  
(
52.8). This robust momentum could reflect the strength of private  
consumption in Q3 2019, buoyed by early purchasing ahead of  
October’s VAT increase. The Bank of Japan’s latest Tankan survey,  
an indicator of business confidence, delivered the same message.  
Manufacturing activity continued to deteriorate in 2019, while non-  
manufacturing companies showed resilience. Given the  
manufacturing sector’s heavy weighting in the Japanese economy,  
however, its troubles could have a greater impact on the country’s  
growth over the coming months. In Japan, manufacturing value  
added is equivalent to 20% of GDP, compared to an OECD average  
of 14%.  
-
-10  
-15  
-20  
2012 2013 2014 2015 2016 2017 2018 2019  
Source: Markit, Ministry of Finance  
In 2020, Japanese GDP growth is expected to decrease further, to  
only 0.2%, compared to 1.2% in 2019. In addition to uncertainty  
over international trade, there is also concern about the 2-point VAT  
increase in October 2019 and the negative impact it is bound to  
have on household consumption. Public policy will remain  
accommodative, both in terms of monetary (which has only limited  
manoeuvring room) and fiscal policy (notably to offset the VAT  
increase).  
The difficulties in Japan’s export sector began well before recent  
trade tensions. Highly concentrated in Asia, and in China in  
particular (nearly 20% of total exports), Japanese exporters have  
had to deal with a generally sluggish environment since 2011, when  
China’s economy began to slow. Japanese exports to China were  
hard hit by a major backlash after the buoyant decade of the 2000s.  
In recent months, the difficulties in China, and in the Asian  
economies in general, have continued to erode the exports of  
Japanese companies. Japanese exports have declined continuously  
for several months.  
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