Japanese economy to recover just moderately in 2016, inflation to remain muted until 2017

In Q4 2015, Japan’s real GDP growth returned to negative territory, with output contracting 0.3% q/q and growing 0.8% y/y. The economy had grown 0.3% q/q in Q3 2015. The economic outlook of the country continues to be muted, according to Scotiabank.

The main reason for weakness in economic growth was struggling consumer. For the entire 2015, Japanese economy expanded 0.5%. The economy is likely to rebound just moderately in 2016 with growth expanding 0.7% as consumer spending will be discouraged by wage growth, noted Scotiabank.

However, private sector investment is likely to be underpinned by higher corporate profits. Economic activity, especially in terms of consumer spending, is expected to noticeably grow in late 2016 and early 2017 before the consumption tax rate is hiked in April 2017, according to Scotiabank.

“We expect Japan’s real GDP growth to average 0.6% in 2017”, added Scotiabank.

Meanwhile, the Bank of Japan is expected to maintain accommodative monetary policy in the near future as it executes its policy of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” introduced in January 2016, noted Scotiabank. Apart from expanding the monetary base by ¥80 trillion annually via large-scale asset purchases, the BoJ applied a -0.1% interest rate to new excess deposits of financial institutions.

Central bank governor Haruhiko Kuroda has emphasized that policy makers are ready to further ease policy if there is a risk to the price stability target of 2% y/y for core inflation. Since the governor has mentioned that there might be a delay in changing the deflationary mindset of people in Japan, it is believed that the previously mention risk has materialized and that additional monetary stimulus is expected in the coming quarters. This will further push the policy rate into negative territory, added Scotiabank.

According to the central bank, inflation target should be attained in between April and September of 2017. Headline inflation in Japan rose to 3% y/y in February from zero in January, while core inflation continued to be at 0.0% y/y.

“Inflation is set to remain muted until April 2017 when the hike in the consumption tax rate will temporarily lift price gains; we expect the headline rate to close next year at 1½% y/y”, according to Scotiabank.