Japan’s Economy Faces Headwinds After Topping 4Q Forecasts
(Bloomberg) -- After a run of smooth sailing, Japan faces choppier economic waters, including a stronger currency and the risk of a global trade war.
Japan’s economy grew a better than expected 1.6 percent in the fourth quarter, but is now likely entering a soft patch, economists say, with a chance that the longest run of expansion in nearly three decades could end in the first quarter. This would hurt the Bank of Japan, which has been making some progress toward 2 percent inflation.
"I think it’s likely we are going to see some deceleration in the pace of economic expansion," said Takashi Shiono, an economist at Credit Suisse Group. "Wages aren’t rising much and that makes it unlikely households will step up spending. A strong yen is posing risks for corporate profits and could cool sentiment among companies and consumers."
The Japanese economy has grown for eight straight quarters as global demand for exports fueled record corporate profits and rising business investment.
One red flag in recent data: Industrial production contracted 6.6 percent in January from a month earlier. That was the biggest drop since March 2011, when the nation was hit by an earthquake, tsunami and nuclear meltdown. Production is forecast to have rebounded sharply in February before falling again in March.
Retail sales also fell 1.8 percent in January from a month earlier, as Japan suffered through a particularly cold start to the year. In addition, a build-up in inventories during the fourth quarter, one reason for a bigger-than-expected revision to growth, could reverse to weigh on first-quarter results.
"Electronic parts inventories are building up, and if you consider an upward revision of inventories from a macroeconomic perspective, it’s not a great move," said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. "So I don’t think we can be too happy."
To be sure, economists remain positive about the longer-term outlook.
"There’s no change to the fact that we’re seeing fairly stable growth," Atsushi Takeda, an economist at Itochu Corp. in Tokyo. "In the long term the fundamentals are still firm."
More than a slowdown in trade, an appreciation of the yen is the "real risk" to economic growth that would weigh on corporate profits and wages, Muto said.
The yen has strengthened more than 6 percent against the U.S. dollar since the start of the year. Corporate profit growth had already been slowing, rising only 0.9 percent in the fourth quarter, the lowest rate since the second quarter of 2016.
“Considering the first quarter this year, given how the yen is strengthening, it’s hard to see a continuation of the picture of manufacturers leading record profits, and we’re already seeing the beginning of a stumble in the fourth-quarter data,” said Yasunari Ueno, chief market economist at Mizuho Securities.
- Gross domestic product expanded an annualized 1.6 percent (estimate +1.0 percent) in the fourth quarter. That compares with a preliminary reading of 0.5 percent.
- Business spending rose 1 percent (estimate +1.3 percent) from the previous quarter. The preliminary reading was +0.7 percent.
- Private consumption increased 0.5 percent (estimate +0.5 percent), versus a preliminary reading of +0.5 percent.
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