Japan: Not as good as it looks

A few months ago, we took the gamble of removing the scheduled October consumption tax hike from our forecast numbers. The effect of this was to smooth both the inflation figures (we no longer have a 12-month bump from 4Q19 to 3Q20), and also the GDP figures (we no longer have the front loading and subsequent consumption and investment lacuna).

All of this is fairly cosmetic, and has very little bearing on overall annual GDP figures, though removing the tax hike does remove the temporary lift that inflation would otherwise get, and makes it harder to see by just how much the Bank of Japan is missing its 2% underlying inflation target.

The revised 1Q19 GDP figure of 2.2% is being touted as the final nail in the coffin for those like us who speculated on a third delay to the scheduled tax hike. But this contrasts with the other message of this release. Namely: outside of some very modest business investment figures, which show few signs of remaining positive in the coming quarters, much of the 2.2% annualised GDP growth came from a rogue net export figure which had imports falling far more sharply than exports, and which in all likelihood, also presages a sizeable inventory drawdown in the quarters ahead.

So although we concede that we may have to put the consumption tax hike back into the numbers, we won’t rush this decision. Indeed, Japan’s data remains moribund. Household spending started 2Q19 much softer than it ended 1Q19, which may also reflect the plunge in labour cash earnings, now running at a negative year on year rate.

Although we concede, we may have to put the consumption tax hike back into the numbers, we won’t rush this decision

On the trade side, Japan is still running a marginal deficit, but there doesn’t seem to be any noticeable improvement from 1Q19, so the likelihood this delivers any boost to 2Q19 GDP growth looks small. Indeed, unwinding the big boost in 1Q19 seems far more likely with the trade war showing no signs of easing and the technology slump still in full swing.

Furthermore, both construction orders and housing starts registered large declines in April and will have their work cut out to claw their way back to positive growth by the end of the quarter.