Schroders Quickview: Japanese GDP figures flatter to deceive

Keith Wade, Chief Economist & Strategist

On the face of it, the Japanese economy rebounded in Q1 with a gain in GDP of 1.7% (annualised) after a drop in output at the end of last year. However, whilst it is good news that the economy avoided the recession some had feared, the figures were boosted by an extra spending day as a result of the leap year. Adjusting for this takes growth down to a 0.5% annual rate which still avoids recession but leaves activity at a lower level than was seen in Q3 last year.

From this perspective, the malaise that hit Japan after the increase in consumption tax in 2014 persists. Whilst the weakness of global trade and particularly the slowdown in China has not helped, the economy continues to struggle to regain momentum.

There are strong rumours that Prime Minister Abe is looking to postpone the next hike in the consumption tax scheduled for April next year. We expect today’s figures to tip the decision in favour of delay, in order to avoid hitting the economy with another round of fiscal tightening. It is likely that such a decision will be announced at the forthcoming G7 meeting. Japan is hosting the event and is keen to promote a coordinated push on fiscal policy given the constraints on monetary policy, and is also set to boost fiscal spending in coming months. Delaying the consumption tax hike would reinforce its own commitment to the cause, although we doubt others will follow.

Issued by Schroder Investment Management (Switzerland) AG, Central 2, CH-8001 Zurich which is authorized and regulated by the FINMA.
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