Japan economy rebounds in Q4 but trade frictions remain a concern

Recovery of business, consumer spending from natural disasters drives 1.4% annualised expansion in Oct-Dec

Published Thu, Feb 14, 2019 · 09:50 PM


JAPAN'S economy expanded in the final three months of 2018 as business and consumer spending recovered from natural disasters; however, global trade protectionism remained a concern for the country.

The 1.4 per cent annualised expansion in October-December matched the median estimate in a Reuters poll.

It followed a revised 2.6 per cent annualised contraction in July-September as floods and an earthquake temporarily halted production.

The data also showed real exports rose 0.9 per cent in October-December from the previous quarter, which was the fastest gain in a year.

Despite the increase in shipments, some economists remain concerned that exports will weaken this year if the United States and China do not resolve their trade dispute.

"The numbers have rebounded, but Japan is still an economy that is losing momentum," said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley Securities.

"The longer trade friction lasts, the more incentive Japanese companies have to halt capex. Trade friction means weaker exports. Japan's overall growth this year won't be as quick as last year or the year prior."

Data from the Cabinet Office showed that GDP rose 0.3 per cent versus the previous quarter, slightly less than the median estimate for 0.4 per cent growth.

That followed a downwardly revised 0.7 per cent contraction in July-September.

In September, a large earthquake triggered a blackout in the northern island of Hokkaido, which followed severe typhoons that damaged airports and transport infrastructure in western Japan.

Businesses were quick to resume normal operations after these disasters.

Capital expenditure was the biggest driver of growth in October-December, rising 2.4 per cent.

That compares with a 2.7 per cent contraction in the previous quarter, a smaller decline than initially estimated. The median estimate was for capital expenditure to rise 1.8 per cent.

Private consumption, which accounts for about 60 per cent of gross domestic product (GDP), was the second-biggest driver of growth.

Consumption rose 0.6 per cent in October-December, which was less than the median estimate for a 0.8 per cent increase and followed a 0.2 decline in the previous quarter.

"The economy is in gradual recovery as growth is led by private demand," Japanese Economy Minister Toshimitsu Motegi said in a statement.

"China-bound exports of information-related materials have weakened as the Chinese economy slowed. We need to monitor uncertainty over global economic outlook including Chinese economy as well as fluctuations in financial markets."

External demand - or exports minus imports - shaved 0.3 per centage point off GDP, less than the median estimate of minus 0.4 per cent.

A breakdown of the data showed a 2.7 per cent jump in imports more than offset the increase in exports.

Despite the rise in exports, some economists remain cautious about the outlook for overseas demand.

A trade war between the US and China, the world's two largest economies, is a major risk for Japan's exports of car parts, electronics, and heavy machinery to China, which are used to make finished goods destined for the US and other markets.

"We expect exports for January-March will deteriorate as shipments of IT-related products to Asian nations, especially to China, will likely fall as the adverse impact from trade conflict appears," said Hiroaki Muto, the chief economist at Tokai Tokyo Research Institute.

"The economy for January-March is expected to grow but the global economic slowdown and a planned sales tax hike will hurt."

Another risk is the Japanese government's plan to raise the nationwide sales tax to 10 per cent from 8 per cent in October.

The government needs the extra tax revenue to pay for rising welfare costs, but some policymakers and economists worry the tax hike could hit consumer spending and weaken sentiment. REUTERS

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