Ambiguous external, domestic demand outlook challenging for Japan’s economy to meet Abenomics target

In spite of Japanese economy expanding at a strong momentum in 2016, a clouded outlook for external and domestic demand makes it challenging to meet Abenomics’ ambitious targets, noted Nordea Bank in a research report. The Japanese economy is expected to continue to depend on fiscal and monetary stimuli while reforms progress slowly.

In 2016, the growth momentum has been strong. The Japanese economy has not recorded any negative growth figure for the initial three quarters and the economy is expected to be operating at full capacity. However, the real GDP growth is quite below the ambitious target set by Abenomics. Domestic consumption and investment are expanding at a slower rate as compared to 2011-2013, restricted by weak earnings growth and lack of confidence.

Japan’s net exports have been a significant driver; however, the future appears quite uncertain. Trump has promised to pull the U.S. out of the Trans-Pacific Partnership (TPP) trade deal, which might hamper the outlook of Japan’s export. Japan is unlikely to experience the grand growth revival that Abenomics aims for, stated Nordea Bank.

“Due to the new GDP calculation methodology adopted in December, our growth forecast is revised up to 0.9 percent (from 0.7 percent) for 2016, down to 0.7 percent (from 0.8 percent) for 2017 and unchanged at 0.7 percent for 2018”, added Nordea Bank.

Increased commodity prices and a weaker yen are likely to lift inflation out of the negative territory in the months ahead. However, it is unlikely to see a fundamental rebound in inflation to meet the Bank of Japan’s above 2 percent target, as there is no sustainable rebound in demand.

“While the solid growth momentum last year, expected rise in inflation and a weaker yen may dampen easing expectations, we hold on to our call for a rate cut by 10bps in H1 and another 10bps in 2018”, said Nordea Bank.

The Japanese government is expected to depend mostly on accommodative fiscal policy to keep growth on the positive path in 2017. The low borrowing costs have alleviated the government’s debt service burden and left room for easing.