We expect Q1 2017 to be the fifth consecutive quarter of positive GDP growth in Japan. Assuming our forecasts are correct, this will also be the third consecutive month of positive growth driven in particular by external demand for Japanese exports. We forecast 1.6% growth for Q1 2017, however, should external demand and consumption exceed expectations, we could very well see 1.9% growth. Although capital expenditure growth may be negative due to weak machinery orders and durable goods shipments, we believe impact of this will be minimal. The yen may further weaken should we see growth higher than 1.9% and vice versa, but any reaction will be temporary. We believe the yen will continue to weaken and support external demand growth.
While events overseas have impacted the financial markets, we do not see much effect on Japan’s GDP. Looking ahead, Q2 2017 GDP will also depend on external demand. We believe future growth will be sustainable, and depend not only on demand from China and Asia, especially driven by demand for smart phone parts, but also for semiconductors used for the Industrial Internet of Things (IoT) in factories, and durable goods orders (eg. construction machinery).
Primary focus should be on the corporate sector. With growing external demand set to continue, we believe there will be the need for many companies to replace machinery and equipment. The crucial question is how far capital expenditure will be increased in the meantime. Households should see increased incomes as stronger corporate earnings lead to higher bonuses, however base wages will only rise gradually and therefore consumption will only rise accordingly. We don’t see strong inflation on the horizon as consumption should remain muted. The current Bank of Japan (BoJ) policy is supportive for companies raising capital and for consumers buying homes, but its impact on GDP growth has been minimal. Nonetheless, the central bank’s decision not to publish its exit strategy has been successful in curbing speculation.
Katsunori Kitakura is lead strategist at SuMi TRUST