Pedestrians cross a street in Osaka, Japan. (Photographer: Buddhika Weerasinghe/Bloomberg)  

Japan’s Economic Rebound Fails to Dispel Concerns Over Momentum

(Bloomberg) -- Japan returned to growth in the final quarter of 2018 but that did little to ease concerns about the effects of softening external demand on its export-dependent economy.

Business investment and consumer spending did most of the heavy lifting as the economy expanded an annualized 1.4 percent, matching economists’ estimates for a modest rebound from a sharp contraction during a natural disaster-hit third quarter.

Exports grew only 0.9 percent from the previous quarter, less than the size of the decline last quarter when typhoons and an earthquake hit output. With growth slowing in China and elsewhere, Japan is likely to follow suit.

"Exports were supposed to show a big jump after the previous fall but they just limped along," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "If you average all the data out, Japan’s economy is clearly slowing."

Japan’s Economic Rebound Fails to Dispel Concerns Over Momentum

With imports rising more than outbound shipments, trade shaved 0.3 percentage point off the overall economic expansion, matching the largest chunk taken out of growth in the last five years.

Economy minister Toshimitsu Motegi said slowing growth in China, and in particular its softening demand for tech-related items, contributed to the weakness in exports. He flagged the direction of the Chinese economy and the U.S.-China trade battle as risks to the government’s baseline view that Japan will maintain a moderate expansion.

Japan Manufacturing Expansion Stalls in January

Early data already points to a sharp slowing of factory output in January. If external demand continues to soften, sapping business sentiment, Japan’s economy could be in a vulnerable place ahead of a sales-tax increase planned for October.

The Bank of Japan sees the economy growing 0.9 percent in the year starting in April, judging that government measures to ease the impact of the tax will support growth. Still, the latest rebound is unlikely to sway the central bank’s resolve to stick with its stimulus to support prices and the economy.

A deal between the U.S. and China on trade could release a lot of held back investment that could improve the prospects for Japan’s economy, said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities Inc.

"Still, we should be cautious about the outlook for exports given that overall global growth is peaking out," he said.

What Our Economist Says...

“A bounce in capex was to be expected after a dip in 3Q -- and it registered in line with our estimate. More important is how durable the spending by businesses will be going forward,” said Bloomberg Economics’ Yuki Masujima. "Our view is that Japanese companies are eager to expand domestic capacity on a longer-term horizon. Any plans, though, could get knocked off track if external demand weakens further."


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