Japan struggling for traction
The news is not so good in Japan where economic conditions remain more challenging. The economy moved out of recession at the end of 2014 but has since struggled to build any meaningful momentum. The weaker exchange rate is helping the external sector but domestic demand conditions remain weak.
March quarter GDP growth was stronger than expected but much of this was due to the strength of inventory investment which will likely impact negatively on production in the period ahead.
Japan industrial production
Annual % change
Source: METI, Markit
Consumer spending remains particularly underwhelming, especially in light of the recent strength in the labour market. Spending has not yet recovered to the level that prevailed before the pre-tax increase inspired ‘rush demand’.
On the inflation front, core inflation is barely positive and we see no significant upside in the near term. In our view, the Bank of Japan (BoJ) continues to be over-optimistic in its expectation a 2% inflation target will be achieved. We expect the BoJ will be forced to boost its efforts to ease financial conditions but the need for this will only become evident as inflation continues to undershoot their expectations.
Our view remains that progress on the ‘third arrow’ of Abenomics – the structural reform piece – remains sufficiently underdeveloped to allow any degree of confidence that the Japanese economy can achieve sustainably higher growth in order to achieve sustained inflation at 2% per annum. Significant regulatory and labour market reform is still required.
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