Japan’s real GDP growth likely to have turned negative in Q4

In 2015, Japan's real GDP growth was on a rough path, expanding 1.1% q/q in Q1 and then contracting 0.1% q/q and -0.5% q/q in annualised terms in Q2. In Q3 Japan's real GDP registered a positive growth; however, Q4 print is expected to have contracted again.

"We expect Q4 real GDP to show negative growth of -0.1% qoq (-0.2% qoq annualised) after a modest positive reading of +0.3% qoq (+1.0% qoq annualised) in Q3", says Societe Generale.

There are several reasons for the possibility of a negative Q4 reading. Business sentiment in the country dropped due to uncertainty in the global economy. In Q4, real capex is expected to have declined by 0.1%, as compared with a growth of 0.6% registered in Q3. Inventory investment has not yet increased. It should have risen if corporate inflation expectations are rising. Inventories are likely to have declined in the fourth quarter and are expected to have subtracted 0.2 percentage points from the real GDP growth.

The likely drop in Q4 GDP growth is also because of delays in executing policy measures. The Bank of Japan, in October 2015, had cut its inflation and economic outlook and also pushed back the timing of achieving the inflation target rate of 2%. However, the central bank did not implement any additional easing measures. During its December meeting, it executed supplementary measures to bolster asset purchase operations.

However, the BoJ was unsuccessful in averting the appreciation of yen, as the market felt the central bank's monetary easing was having very few impacts. Finally, the BoJ implement additional easing measures in January. However, the delay led to a further drop in consumer and corporate confidence. The Japan's government expenditure is likely to have contributed 0ppts to the real GDP growth in Q4.

Meanwhile, consumer confidence has continued to remain weak because of implementation of the consumption tax rise in April 2014. In Q4, real consumption is expected to have been weak, declining 0.6% q/q after rising 0.4% q/q in Q3. Lastly, the GDP deflator is increasing significantly due to a rebound in terms of trade on large drop in oil prices. This will technically push down the real GDP growth, as compared to nominal GDP.

"We expect Q4 nominal GDP to grow at +0.4% qoq (was also +0.4% qoq in Q3). Aggregate wage (nominal compensation of employees) is likely to have expanded to around 2% yoy in Q4, after 1.7% yoy in Q3 2015", says Societe Generale.

Meanwhile, employment and wages are explicitly improving. The jobless rate is declining continuously. The aggregate wage is experiencing firm growth; however, average wages per person have not grown much because of a rise in part-time workers due to the tightening of labor supply and demand. Consumers are likely to feel that real income is growing in 2016.