24 Jan 2020

The Japanese economy narrowly avoided a decline in Q3, as GDP growth was recorded as an anaemia 0.1%.  Nevertheless for 2019 as a whole, Japan is likely to be the only major developed economy where economic growth is expected to have exceeded the rate achieved in the previous calendar year, albeit a modest 0.9% compared with 0.8% for the prior twelve months.

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Domestic demand held up well, buoyed by both extremely low unemployment, which remained at its lowest reading since the early 1990s, and spending brought forward by consumers ahead of the autumnal increase in VAT.  Tourism associated with the Rugby World Cup would also have been a factor in the third quarter and some further effect is likely to have persisted into Q4.  Capital expenditure remained supportive of economic activity as Japan continued its preparation for next year’s Olympic Games but exports suffered from both weak external demand and from continuing uncertainty about the US/China trade negotiations.
Tourism associated with the Rugby World Cup would also have been a factor in the third quarter and some further effect is likely to have persisted into Q4.
Interest rate policy set by the Bank of Japan remains supportive with money market rates in negative territory and this has kept the yen from strengthening; indeed during the fourth quarter the currency slipped by more than 3% when compared with the euro and fell slightly versus the dollar, but was over 8% down against a politically buoyant pound, effectively offsetting for sterling-based investors the stock market Q4 bounce.  Such currency weakness should help Japan’s international competitiveness but the easing of trade tensions in light of the apparent first phase agreement between China and the United States is likely to do more to boost Japanese export activity over the winter months.
Prime Minister Abe, as of Q4 the longest serving premier in Japanese history, indicated he would not intend to serve a fifth term when the present one ends in 2021, but continues to struggle with insipid economic growth and negligible levels of inflation.  His biggest challenge however remains Japanese demographics-the number of births in calendar 2019 was the lowest recorded in more than a century and was 0.5m below the number of confirmed deaths, thus increasing the pressure on Mr Abe in his remaining two years of office to develop a more effective immigration plan.

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