Japan’s GDP likely to grow 0.6 pct in 2016-2018, monetary policy to be on hold ahead, says Scotiabank

The Japanese economy would be able to outperform its low potential growth of 0.25 percent year-on-year with the help of stimulative monetary and fiscal policies. According to a Scotiabank research note, the Japanese economy is expected to grow 0.6 percent year-on-year in 2016-2018. The preliminary estimates indicated that Japan’s real GDP expanded 0.5 percent sequentially in the third quarter and 0.9 percent year-on-year after a sequential rise of 0.2 percent and a year-on-year gain of 0.6 percent in the second quarter.

In spite of high corporate profits, business investment has yet to rebound in a sustainable manner. Fiscal transfers and low commodity prices underpin consumer spending, but the shrinking labor force of Japan continues to distort the long-term household consumption prospects. Japan’s production activity and exports continue to be sluggish, negatively affected by subdued global trade and yen strength. In JPY terms, exports fell 9 percent year-on-year in the January to September period.

Meanwhile, the Bank of Japan is expected to keep its monetary policy stance on hold in the months ahead as it has restricted room for additional easing. The BoJ had introduced a new monetary policy framework in September that has two key elements: “yield curve control” and “inflation-overshooting commitment”.

The central bank’s government bond purchases are expected to be maintained at around JPY 80 trillion annually. The policy framework’s inflation aspect underlines authorities’ commitment to keep accommodative policies in place until Japan’s 2 percent year-on-year inflation target is exceeded in a stable manner.

Japan’s inflation continues to be in deflationary territory with prices falling 0.5 percent year-on-year in September. Inflation target is unlikely to be attained in the near future given weak wage growth and muted inflation expectations, stated Scotiabank. Headline inflation is likely to reach 1 percent year-on-year in 2018.