Japan’s Q2 GDP print – released on Monday – absolutely crushed it. For anyone younger than 50, the thought of Japan growing faster than a snail’s pace is unfamiliar territory.
The 4.1% preliminary economic growth rate for Q2 was well beyond expectations and driven by both healthy capital investment and retail sales. While we believe this number will be revised downward – it is, after all, just a preliminary data release – it’s likely Japan is growing at an enviable clip given the sleepy economic performance of most developed economies.
Japan’s economy is, of course, driven by intoxicated central bank policies that include negative interest rates and indirect nationalization of equity markets through ETF and public equity purchases. Japan’s central bank now holds nearly three-quarters of all ETFs in the country and nearly 100% of the free-floating shares of major companies like Fast Retailing (Uniqlo).
Central bank desperation has delivered some tangible benefit and, hopefully, some economic momentum. Going into 2018, we expect Japan to grow around 2.5% each quarter, which will slow slightly in 2019, but remain above 2%. Wage gains will finally accelerate in 2018, but continue to stay well behind inflation.
Domestic strength will continue to aid Japan’s growth. Retail sales, which supported Q2’s growth surprise, will accelerate from mid-2018 until mid-2019, solidly supporting next year’s healthy economy. Investment growth – which will peak in 2017 – may contribute less to economic growth in the coming years but the decline is likely to be a slow one. Government spending, however, will take a break in 2018 after a rapid rise in 2017, then re-accelerate in 2019.
Trade, a historical strength for Japan, will continue to weaken. Export growth will be around 0.05% in 2018 and 2019, before breaking to a decline in 2020. The weak Yen – the great enabler of trade growth under Abenomics – has lost its luster, as BoJ-induced devaluation seems to have concluded and may even reverse.
After years of exceedingly loose monetary policy, Abenomics is achieving results. Finally.
*Data are shown from Complete Intelligence's Macroeconomics and Trade Forecasts interface.
