Japanese economy: Exiting from negative gear growth – Nomura

FXStreet (Delhi) – Research Team at Nomura, suggests that the even though the Japan’s real GDP growth for 2015 Q3 came in at -0.8% q-q annualized, representing the second consecutive quarter of negative growth, the economic downturn is not as bad as suggested by the reported figures because final demand minus inventories has been picking up.

Key Quotes

“We see little risk of sustained large-scale inventory corrections and also see good prospects for a recovery in industrial production, with which real GDP exhibits a strong degree of correlation. We think the economy could well return to growth in Q4.

Exports likely to increase modestly despite overseas economic slowdown: Exports have remained on an upward trajectory and we have yet to see any strong signals of downside risk. Overall, we think that overseas economies will continue to expand modestly despite the ongoing slowdown in China. We see little risk of the Japanese economy being tripped up by falling external demand.

Improving profitability a structural factor supporting capex: Capex has fallen for two straight quarters. This has prompted widespread disappointment, especially because the BOJ Tankan has revealed bullish capex projections. However, it would be premature to conclude that there has been any major decline in capex enthusiasm in the corporate sector. We think capex will not buckle easily because it is supported by the structural factor of improving profitability.

Consumer spending boosted by improvements in consumer sentiment and income and employment conditions: Consumer spending has been recovering, albeit still slowly. Rising inflation expectations have partially dented consumer sentiment, but this factor may disappear in due course. Consumer spending may also receive a boost from sustained improvement in income and employment conditions owing to tighter supply-demand conditions in the labor market.

We still expect additional monetary easing in April 2016: We think the BOJ will engage in an additional round of monetary easing in April 2016 because (1) it will need to further boost inflation expectations in order to achieve its 2% inflation target and (2) JGB supply constraints mean it will probably announce that it is thinking about tapering JGB purchases around the same time, increasing the need for policies to counteract the impact of potentially unwelcome developments for the markets. We think the BOJ could well end up with some kind of de facto yield curve target.”
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