All Tortoise, No Hare: Japan's Economic Growth Continues

Japan extended its longest stretch of uninterrupted growth since 1986 in the fourth quarter. Although the pace of growth slowed, the economy was up 1.6 percent for the whole of 2017.

Slow and Steady

Japan has successfully registered the longest period of uninterrupted growth since the 1986 expansion. That is, with GDP rising in each of the past eight quarters, Japan’s economic performance has been slow but sustained. The economy expanded at a 0.5 percent annualized pace in the fourth quarter. Admittedly, this was below market expectations and marks the slowest pace of growth in over a year, but the steady expansion continues to foster sturdy if somewhat modest conditions for expansion in Japan. Fourth quarter growth was largely driven by domestic demand. Personal consumption grew at a 1.9 percent annualized rate, fast enough for consumption to boost the headline figure by 1.1 percentage points and offset declines in other areas. The strength in consumer spending was evident in a pick-up in imports, which resulted in a 0.3 percent drag from net exports on fourth quarter growth as import growth outpaced more modest gains on the export side. As the labor market continues to tighten, we expect consumer spending to continue to strengthen this year.

Despite the uptick seen in consumption, business fixed investment growth was flat over the quarter. The contribution to growth from investment is roughly in-line with rates seen throughout the current expansion so a flat reading here does not set off major alarm bells. An additional cause for the miss in the expected pace of growth has to do with the decrease in government spending. This reduction, however, demonstrates less assistance from government stimulus, and actually reveals encouraging dynamics for the overall economy, despite the 0.1 percentage point drag that slower public investment had on growth.

Modest Improvements Ahead

For the year as a whole, Japan’s economy increased 1.6 percent. This marks the fastest growth rate since 2013. Incidentally that was the first full year that Abenomics were in place and the introduction of what the Bank of Japan (BoJ) then called quantitative and qualitative easing. As expected, at its most recent policy meeting the BoJ left its policy rate unchanged, despite dialing back its pace of bond purchases. Although core CPI inflation saw a slight uptick in December, inflation remains below the two percent target rate of the BoJ, likely continuing to confirm its intent to keep current policy accommodation intact. Continued firming in the labor market should eventually lead to increased wage pressures, which could help underpin inflation. We expect Japan’s slow but sustained economic expansion to continue in 2018 amid strong consumer spending and modest improvements in inflation. 

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