Japan’s economy shrank in the final three months of 2015, official figures show

15th February 2016


Japan’s economy shrank by a greater than anticipated 0.4% during the final three months of 2015, according to official numbers.

This marks the second quarterly drop in output over the past year, and left activity a mere 0.5% above the level recorded a year earlier.

The Bloomberg median was expecting a -0.2% drop during the fourth quarter while research group Capital Economics had forecast a 0.1% rise.

The preliminary estimates add to a string of setbacks for the government’s economic reform policy.

Marcel Thieliant, senior Japan economist at Capital Economics highlighted that in January’s outlook report, the median forecast for GDP growth in the current fiscal year among Bank of Japan Board members was 1.1% but he added that these figures suggest that the outcome will be closer to 0.5%.

He said: “Together with the recent slump in the Nikkei and the appreciation of the yen, the case for additional easing remains compelling. Our forecast is that the Bank will step up the pace of its asset purchases to ¥90 trillion and cut the interest rate on excess reserves to -0.3% next month.”

He noted too that the recent appreciation of the yen, even if sustained for longer, should not have a major impact on external demand nor consumer prices. However Thieliant cautioned that it will lower corporate profits and could reduce firms’ willingness to lift wages, thus further delaying the pick-up in earnings required to hit the Bank of Japan’s inflation target.

“We retain our view that the yen will weaken towards 130 against the dollar by year-end, from 113 today. However, it is worth examining the impact on economic activity and inflation if the exchange rate remained strong,” he added.

Adrian Lowcock, head of investing at AXA Wealth believes the GDP figure could easily be revised upwards.

He said: “Stock markets are in a fickle mood, fears over global growth sent them tumbling at the beginning of 2016, however when evidence of weaker growth in Japan came through that market rallied.

“Weak economic data will naturally lead to many voicing concerns over the success of Abenomics. However it is likely to leave the door open for more Quantitative Easing, whilst a weaker Yen is good news for Japanese exporters.

“We remain generally positive on the region but suspect there will be more volatile days to come.”

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