Net exports drive Japanese economy in Q4, domestic demand to remain subdued on weak wage growth in 2017

The Japanese economy expanded firmly in the fourth quarter of 2016. The GDP grew 0.2 percent sequentially in the December quarter, slightly lower than consensus expectations of 0.3 percent growth. The annualised growth rate came in at 1 percent, lower than 1.4 percent in the prior quarter and consensus expectation of 1.1 percent. The data has shown a solid growth momentum in Japan in spite of the small disappointment. For 2016 as a whole, the Japanese economy grew 1 percent, possibly higher than the potential growth.

Net exports have mainly driven the economic growth in the fourth quarter. A weaker Japanese yen supported the exports in the latter half of 2016. However, the outlook of export for this year is ambiguous due to Trump’s potential protectionist policies. The U.S. has already withdrawn itself from the Trans-Pacific Partnership that might result in the trade deal to break down eventually, noted Nordea Bank in a research report. This might negatively impact Japanese exports and also be a setback to Premier Abe’s reforms.

Meanwhile, domestic demand continued to be weak in the fourth quarter delivered an annualised growth rate of zero. Even if household consumption and private investment expanded steadily by 0.4 percent and 1.7 percent in 2016, respectively, neither of them has had consistent positive contribution to the economic growth in the last three years, stated Nordea Bank. Sluggish wage growth and lack of confidence regarding a continuous turnaround of growth might continue to restrict Japanese domestic activity this year.

“We maintain the view that one of the best solutions to boost consumer and business confidence is to reform the two-tier labour market. This would raise base salary and translate into higher private spending”, added Nordea Bank.

Furthermore, the fourth quarter did not provide positive news regarding inflation. The GDP deflator provided a less upbeat inflation story than the CPI inflation. In the last few months, the headline CPI inflation has accelerated with the help of recovering commodity prices. However, the GDP deflator has stayed at -0.1 percent, the lowest in over three years. This suggests that deflationary pressure in not entirely gone in Japan.

At 5:00 GMT the FxWirePro's Hourly Strength Index of Japanese yen was neutral at -40.5048, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 23.2547. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex