Japan: Old Style

Fourth-quarter growth was a bit of a 'dead-cat' bounce. Consumption is struggling to grow, despite better wage growth and inflation isn't going anywhere. This is spurring some talk of action at the Bank of Japan.

Source: Shutterstock

As we feared, 4Q18 GDP failed to bounce back as strongly as we had initially hoped. After a 2.6% annualized decline in 3Q18, the 1.4% bounce in 4Q18 was of the distinct ‘dead-cat’ variety. Certainly not the ‘sharp bounce’ one business TV channel reported on the day. And since then, the data hasn’t got much better.

4Q18 GDP failed to bounce back as strongly as we had initially hoped

One of the biggest disappointments for Prime Minister Shinzo Abe, we imagine, must be that after convincing businesses to be more generous with wages, which they are now with wage growth honing in on 2.0% year-on-year, household spending still remains virtually flat. The idea that paying people more through scheduled cash earnings and not through one-off bonuses would lead to a smaller percentage being saved, has simply not been borne out by reality.

Cash wages and household spending

Source: Bloomberg, CEIC

Exports are, like everywhere else in Asia, falling - a combination of trade war effects and the global slump in semiconductor/electronics demand. And corporate profits are weakening – which doesn’t bode well for either continued wages or employment growth, and puts a question mark over recent capital spending figures, which came in a little stronger than expected.

Inflation data, too, has utterly failed to make it any further and has now drifted back in the direction of zero. This isn’t a big deal as far as the real economy goes. Japan isn’t exhibiting any genuine ‘deflationary trends’, but it’s encouraging the Bank of Japan to talk up remedial policies aimed at pushing inflation in the direction of their 2.0% target.

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Gary Anderson 7 months ago Contributor's comment

Since inflation is not happening, Japan needs non sterilized helicopter money.