The Japanese economy continues its recovery
The Japanese economy appears to be picking up, albeit slowly. In the final quarter of last year real GDP rose 1.3 per cent, this was the fastest pace in almost three years, and was up 2.1 per cent on a yearly basis. This shows a strong bounce back...
The Japanese economy appears to be picking up, albeit slowly. In the final quarter of last year real GDP rose 1.3 per cent, this was the fastest pace in almost three years, and was up 2.1 per cent on a yearly basis. This shows a strong bounce back after weakness in the previous quarter. Growth of domestic demand was generally strong, led by private consumption which bounced back by 1 per cent, reversing a previous decline of -1.1 per cent.
Private capital investment was notably strong as well, rising by an annualised 11.4 per cent which is the fastest pace in six years. It is true this was exaggerated by weakness of the previous year, but the overall trend looks robust. This was underlined by the rebound of private machinery orders early this year, which points to an acceleration of orders growth after stagnation in the second half of last year. In any case, the trend of actual spending was never as weak as the order growth implied, partly because of the exaggerated share of IT-related orders in the private machinery orders series, which had been the main source of weakness.
However, exports rose just 6.2 per cent, the slowest pace in a year and a half. This raises concerns that a slowdown in US growth could feed into slower growth of domestic demand this year. The extent of the downside risk is limited, though, due to strength elsewhere in the global economy, notably Europe and Asia.
Moreover, the data did not entirely erase doubts about consumer spending. Real consumer spending in the final quarter of last year was no higher than in the second quarter and was up only 0.5 per cent, still weak. Real employment income rose 1.4 per cent, mainly due to sustained employment growth, but wage growth remains weak. Early evidence indicates that winter bonus payments were about flat, significantly weaker than the previous year's increase.
The GDP deflator fell 0.5 per cent, the smallest decline in two years, although the consumption deflator fell somewhat after the rise in the previous quarter, partly reflecting lower oil prices.
HSBC Research has revised its 2007 GDP forecast for Japan upwards to 1.8 per cent. This does not reflect any major change in the global growth environment, as the growth outlook for the US remains cautious, reflecting the expectation that the sharp drop in housing investment will have negative impacts on both consumer spending and private capital investment. If anything, consumer spending in the US has held up better than expected, while capital investment has weakened more sharply than expected.
Elsewhere, the outlook is better, as growth prospects in Europe and Asia look somewhat stronger, the latter mainly in China and India. Also, a weaker yen rate is expected and this should provide less of a headwind to Japanese exporters.
As a result, the forecast for export growth in 2007 has been revised up moderately to 4.5 per cent. This should have positive impacts on private capital investment as well, and the growth forecast for that sector has been raised to 5.8 per cent. The recovery of private machinery orders bodes well for capital investment, and private construction orders have been strong in recent months as well. However, the positive impact on private consumption is expected to be limited because of the fiscal drag from income tax increases and wage restraint by companies. Therefore, the forecast consumption is essentially unchanged at 1.3 per cent. The apparently weak result for winter bonus payments underlines the fact that corporate wage restraint appears to remain quite effective.
The fall of the core consumer price inflation rate back to zero in January, coupled with the continued stabilisation of oil prices, raises the risk that the core inflation rate will turn slightly negative in coming months. As a result, consumer price inflation in 2007 is expected to be only 0.1 per cent. The outlook for energy prices remains an important swing factor for the inflation outlook.
A stronger growth outlook gives the Bank of Japan (BoJ) room to normalise policy somewhat faster than previously. On the other hand, the prospect of very weak inflation numbers in the near term is likely to constrain the ability of the BoJ to raise rates somewhat. The extent to which the BoJ revises down the inflation forecast in its economic outlook report next April should provide some indication of this. The BoJ might be reluctant to raise interest rates before the Upper House election next July, although the importance of this factor is less certain.
Therefore, a final rate hike of 25 basis points is expected this year, however, the timing has been brought forward from to the third quarter from the last.
Two more interest rate hikes are expected in 2008. This would bring the target level for the overnight call rate to 1.25 per cent, still below the BoJ's notion of a "neutral" rate, but high enough above zero to give it a fair degree of comfort. This suggests that the BoJ could then shift from its current "forward-looking" mode to a more "data-dependent" approach to setting policy.
Long-term bond yield forecasts have also been revised up in line with the somewhat higher growth outlook and the slightly more rapid timetable for policy tightening by the BoJ.
p This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.
Private capital investment was notably strong as well, rising by an annualised 11.4 per cent which is the fastest pace in six years. It is true this was exaggerated by weakness of the previous year, but the overall trend looks robust. This was underlined by the rebound of private machinery orders early this year, which points to an acceleration of orders growth after stagnation in the second half of last year. In any case, the trend of actual spending was never as weak as the order growth implied, partly because of the exaggerated share of IT-related orders in the private machinery orders series, which had been the main source of weakness.
However, exports rose just 6.2 per cent, the slowest pace in a year and a half. This raises concerns that a slowdown in US growth could feed into slower growth of domestic demand this year. The extent of the downside risk is limited, though, due to strength elsewhere in the global economy, notably Europe and Asia.
Moreover, the data did not entirely erase doubts about consumer spending. Real consumer spending in the final quarter of last year was no higher than in the second quarter and was up only 0.5 per cent, still weak. Real employment income rose 1.4 per cent, mainly due to sustained employment growth, but wage growth remains weak. Early evidence indicates that winter bonus payments were about flat, significantly weaker than the previous year's increase.
The GDP deflator fell 0.5 per cent, the smallest decline in two years, although the consumption deflator fell somewhat after the rise in the previous quarter, partly reflecting lower oil prices.
HSBC Research has revised its 2007 GDP forecast for Japan upwards to 1.8 per cent. This does not reflect any major change in the global growth environment, as the growth outlook for the US remains cautious, reflecting the expectation that the sharp drop in housing investment will have negative impacts on both consumer spending and private capital investment. If anything, consumer spending in the US has held up better than expected, while capital investment has weakened more sharply than expected.
Elsewhere, the outlook is better, as growth prospects in Europe and Asia look somewhat stronger, the latter mainly in China and India. Also, a weaker yen rate is expected and this should provide less of a headwind to Japanese exporters.
As a result, the forecast for export growth in 2007 has been revised up moderately to 4.5 per cent. This should have positive impacts on private capital investment as well, and the growth forecast for that sector has been raised to 5.8 per cent. The recovery of private machinery orders bodes well for capital investment, and private construction orders have been strong in recent months as well. However, the positive impact on private consumption is expected to be limited because of the fiscal drag from income tax increases and wage restraint by companies. Therefore, the forecast consumption is essentially unchanged at 1.3 per cent. The apparently weak result for winter bonus payments underlines the fact that corporate wage restraint appears to remain quite effective.
The fall of the core consumer price inflation rate back to zero in January, coupled with the continued stabilisation of oil prices, raises the risk that the core inflation rate will turn slightly negative in coming months. As a result, consumer price inflation in 2007 is expected to be only 0.1 per cent. The outlook for energy prices remains an important swing factor for the inflation outlook.
A stronger growth outlook gives the Bank of Japan (BoJ) room to normalise policy somewhat faster than previously. On the other hand, the prospect of very weak inflation numbers in the near term is likely to constrain the ability of the BoJ to raise rates somewhat. The extent to which the BoJ revises down the inflation forecast in its economic outlook report next April should provide some indication of this. The BoJ might be reluctant to raise interest rates before the Upper House election next July, although the importance of this factor is less certain.
Therefore, a final rate hike of 25 basis points is expected this year, however, the timing has been brought forward from to the third quarter from the last.
Two more interest rate hikes are expected in 2008. This would bring the target level for the overnight call rate to 1.25 per cent, still below the BoJ's notion of a "neutral" rate, but high enough above zero to give it a fair degree of comfort. This suggests that the BoJ could then shift from its current "forward-looking" mode to a more "data-dependent" approach to setting policy.
Long-term bond yield forecasts have also been revised up in line with the somewhat higher growth outlook and the slightly more rapid timetable for policy tightening by the BoJ.
p This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.