Japan’s real GDP growth likely to average 0.6 pct in 2016-17

Economic prospects of Japan continue to be muted. The preliminary estimates showed that the country’s output did not expand in the second quarter after the sequential gain of 0.5 percent recorded in the January to March quarter.

Exports and production activity in the country continue to be weak, negatively impacted by subdued global trade and appreciation of yen. Moreover, weaker growth outlook of the UK and to a small extent of the key euro area nations pose a risk to Japan’s crucial trade sector as 15 percent of its goods exports are shipped to Europe.

Even if the output growth is being underpinned by consumer spending on the back of the fiscal transfers and low commodity prices, Japan’s shrinking labor force continues to hurt long-term household consumption prospects, said Scotiabank in a research report. But, increased corporate profits should translate to increasing business investment in the quarters ahead, yet external uncertainties and unfavorable currency dynamics might restrict the upside potential.

“We expect real GDP growth to average 0.6 percent y/y in 2016-17”, added Scotiabank.

Meanwhile, monetary easing is in sight in the country. The Bank of Japan eased its monetary conditions just marginally in July, continuing to carry out its earlier policy of expanding the monetary base by JPY 80 trillion annually through large scale asset purchases. The central bank kept the guidelines for government bond and real estate investment trust purchases unchanged; however, exchange-traded funds would be bought in larger quantities, noted Scotiabank.

The BoJ is expected to keep applying a negative interest rate of -0.1 percent to financial institutions’ excess balances at the central bank. With the concerns about the central bank’s policy tools’ effectiveness, the BoJ would carry out a complete assessment of Japan’s economic and price outlook and also the impacts of quantitative easing and negative interest rates, stated Scotiabank.

In March inflation in Japan entered the negative territory again, reaching -0.5 percent year-on-year in June. The central bank projects slight deflation to continue in the near term. But it continues to be positive that inflation would reach the target rate of 2 percent year-on-year in the second half of fiscal 2017.

“We do not anticipate the inflation target to be met in the foreseeable future given subdued wage growth and muted inflation expectations that reflect consumers’ persistent deflationary mindset”, noted Scotiabank.

Safehaven flows because of global uncertainties might worsen these obstacles by underpinning the yen, which then would result in lower import prices. Headline inflation in the country is likely to remain below 0.5 percent year-on-year at the end of 2016 and will not be successful in surpassing 1 percent in 2017, according to Scotiabank.