Japan's GDP data: No real upside surprise

The economy has escaped a technical recession based on the revised GDP data. Two consecutive quarters of contraction have been avoided, after the 3Q15 GDP was revised up to 1.0% (QoQ saar) from -0.8% in the initial estimate. But there is nothing to cheer about. The output gap has remained negative as the cumulative growth this year was too small to offset the deep contraction incurred last year during the sales tax hike. Compared to the levels before the tax hike was implemented in 1Q14, aggregate output hasn't fully recovered. 

It is especially disappointing that private consumption, the segment hit directly by the tax hike, remains far from a complete recovery. Consumer spending has grown only 0.5% over the past five quarters, in stark contrast with the 4.8% decline witnessed in 2Q14. During the final estimate of 3Q15 GDP, consumption growth was actually revised down while the upside purely came from investment and inventories. 

Another disconcerting development is that wage growth has lost momentum. A last week's report showed that base wages increased merely 0.1% (YoY) in Sep15 and Oct15, down from the peak of 0.4% in the middle of this year. This suggests that the transmission channel of Abenomics - higher corporate profits, rising wages and stronger consumer spending - has remained weak. Disappointing wage / consumption data and a negative output gap will likely continue to put pressures on the policymakers. Additional monetary stimulus remains a possible option for the next one year.