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Japan Economy – February 2017

Source: OPEC 2/27/2017, Location: Asia

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The Japanese economy continues to experience good growth momentum after a period of declining indicators in past months. It remains to be seen if the momentum continues and is sustainable. But the combination of a low yen and improving OECD-supported exports, as well as monetary and fiscal stimulus, has lifted the country’s domestic consumption. It seems the economy has gained some momentum and the coming months will show if this will be a sustainable trend. Inflation is still low but is likely to increase in the coming months, not only due to rising commodity prices but also supported by a considerable tightness in the labour market, which should lead to rising wages. With the still low inflation rate, the BoJ will also be in a position to continue providing monetary support.

Inflation rose only slightly in December by 0.3%, falling back from its November level when it stood at 0.5%. Given the strengthening of commodity prices in previous months, this trend may continue. However, when excluding the two volatile groups of energy and food, the country’s core inflation figure stood at 0% in December compared to 0.1% in November. Positively, real income continued to rise with pay increases in December of 0.8% y-o-y, the same level as in November. The rising income pattern is also the outcome of a very low unemployment rate, which stood at only 3.1% in December, the same level as in November.

Japanese exports rose in December by 5.4% y-o-y, after more than a year of decline. This dynamic has been supported by the fall in the value of the yen and by improvements in the economies of the OECD. The export of industrial goods and capital equipment recovered sharply. Also, industrial production continued its recovery and rose for the fifth consecutive month, up by 4.7% y-o-y in November, the strongest rise in almost three years. This was also supported by a strong trend in manufacturing orders, which rose by 16.4% y-o-y in November and 11.3% y-o-y in December, pointing to the likelihood of continued rising industrial output.

The improving environment has also been reflected in domestic demand levels. Retail trade had already recovered in November, when it rose by 1.7%, and continued to rise in December at a rate of 0.6% y-o-y after almost a year of decline.

The latest PMI numbers provided by IHS Markit also confirmed ongoing economic improvements. The PMI for manufacturing rose to 52.7 in January from 52.4 in December. The services sector PMI remained at a strong level but retraced slightly to 51.9 from 52.3 in December.

The most recent improvements provide an encouraging sign and point to the upside potential of Japanese growth. Numerous challenges persist and it remains to be seen to what extent the current improvements in the global economy, and the ongoing stimulus measures by the BoJ, will be able to lift growth above current forecast levels. For this month, the economic forecast remains unchanged at 1.0% for 2016 and 1.1% for 2017.

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