Japanese GDP growth for the first quarter of 2013 surprised on the upside, posting an annualised increase of 3.5% (0.9% q/q). The result was ahead of market expectations of an annualised increase of +2.7%. It was all the more impressive for the fact that the higher than expected growth came off a higher base following an upward revision to growth in the fourth quarter of 2012 to an annualised +1.0%.
The growth was reasonably broad-based over
the quarter. Consumption was the star performer,
but exports contributed with their first quarterly increase in a year. Housing investment also remained strong. The only laggard was business investment
which is to be expected given the lags between a boost to confidence and the
implementation of investment plans.
The question is where to from here? There are a number of reasons to believe the
recent strength will be maintained, at least in the near term. Consumer confidence is strong on the back of
recent equity market gains which will support consumption growth and underpin
further gains in the housing market. A
significant public works program following the supplementary budget announced
in February will also support activity in the period ahead. And of course the recent depreciation in the
Yen combined with higher global growth in the latter part of the year
(particularly in America) will provide further support for exports. Business investment is likely to show some
strength as profitability improves on the back of stronger demand and the
depreciation in the Yen.
Remember there are three components of
Abenomics: an increase in fiscal stimulus focussing on public works, an
aggressive monetary easing by the Bank of Japan and structural reforms to boost
productivity. So far we have seen action
on the first two which is delivering gains.
However, from my perspective, it’s progress on the third leg of the
trifecta that’s necessary to make higher growth sustainable.
I think it’s a bit like Europe where the
ECB has created a window of opportunity for politicians to get on with the job
of fiscal consolidation and structural economic reform; in Japan fiscal and
monetary stimulus is creating a window of opportunity for the Government to get
on with the hardest part of the reform agenda.
We need to see policy reform in goods markets, the regulatory
environment (particularly the regulation of network industries) and the labour
market also needs some work to address rigidities.
An important part of the necessary
structural reform is dealing with the related issues of tax reform and unsustainable
fiscal settings. Japan needs a long-term
fiscal plan (where have we heard that before?).
Here’s where a better economic environment is creating room to move. An increase in consumption tax is scheduled
to take effect in two steps from April 2014.
At that point the tax increases from 5% to 8% and then again to 10% in
When the tax increase was announced it was
qualified with the implementation being conditional on the state of the economy
at the time. This recent economic strength
and its likely continuation this year means the consumption tax increases are
more likely. They will take an economic
toll and inevitably add volatility to the growth profile over the next couple
of years as people pre-spend prior to the tax increases, followed by a soft
patch. But they are a step in the right tax-reform
We see annual average growth of 1.6% (2.9%
q4/q4) in calendar 2013 followed by 1.4% (0.5% q4/q4) in 2014. After that we see growth slipping back to
trend growth of around 1.0-1.5% per annum.
I need to see a more ambitious reform agenda getting too excited about
the medium term outlook.