BlackRock Investment Institute

Macro insights

Signs of a growth pickup in Japan

Japanese economic data due this week are expected to show further signs of improving growth and firming inflation. Abating global trade uncertainty, an uptick in  activity for Japan’s key trading partners, notably China, improving manufacturing sentiment and loose financial conditions have helped to brighten the outlook. Our BlackRock Growth GPS for Japan and consensus expectations both appear to be bottoming out as the impact  from the hike in the  value-added tax implemented in the fourth quarter of 2019 fades.

Japan growth GPS and FCI

Sources: BlackRock Investment Institute, Consensus Economics and Bloomberg, January, 2020. Notes: The FCI line shows the rate of GDP growth implied by our financial conditions indicator (FCI), based on its historical relationship with our Growth GPS. The BlackRock Growth GPS shows where the 12-month forward consensus GDP forecast may stand in three months’ time. The consensus line shows the current 12-month economic consensus forecast, as measured by Consensus Economics. The FCI inputs include policy rates, bond yields, corporate bond spreads, equity market valuations and exchange rates. Forward-looking estimates may not come to pass.

Financial conditions remain highly accommodative, as shown in the chart above. That said, historically the relationship between financial conditions and the growth GPS has not been as close in Japan as in the U.S. or the euro area. Stronger than expected economic activity data from China last week should augur well for Japanese trade dynamics.

Chinese activity data showed a strengthening in domestic demand as retail sales grew at 8.0% year/year in December and industrial production accelerated to 6.9% year/year driven by manufacturing pick-up. These improvements should have a positive knock-on effect on Japan. Our Growth GPS sees growth accelerating to 0.72% in the next three months and returning to the Bank of Japan’s (BoJ) estimate of potential growth of around 0.75%.  Earlier this week the BoJ upgraded its growth forecast for 2020 and 2021. An improving domestic economy and rebounding global activity underpin our constructive views on Japanese corporate fundamentals, particularly those that are most sensitive to cyclical upturns – which account for a considerable part of the Japanese economy.

On Friday, core consumer price index (excluding fresh food and energy) for December is due. The Thomson Reuters consensus sees an acceleration to 0.7% year/year from a 0.2% pace – still well below the BoJ’s projection of 1.1-1.4% in 2020 and far below the 2% target, showing muted inflation expectations even after last year’s value added tax increase. But a positive output gap of around 1% and tight labour market support the BoJ view of a pickup in inflation.