The still-faltering economy, hit hard by April’s consumption tax hike as well as bad weather last summer, is forecast to grow only modestly in fiscal 2015 despite the Abe administration’s latest economic stimulus package.
“I would expect positive growth (for the fiscal year starting in April), but I don’t think it will reach 2 percent,” said Yasunari Ueno, chief market economist at Mizuho Securities Co.
Many economists such as Ueno see Japan’s real gross domestic product shrinking by about 0.5 percent in fiscal 2014, which will end this March 31, before growing between 1.5 percent and 2 percent in the following fiscal year.
That forecast assumes the current recession won’t last long. But it also suggests economists aren’t entirely confident that “Abenomics” — one of the major factors behind the landslide victory of Prime Minister Shinzo Abe’s Liberal Democratic Party in the snap Lower House election on Dec. 14 — will be able to resuscitate the troubled economy.
Following the 3 percentage point hike in the consumption tax to 8 percent on April 1, the economy shrank by an annualized rate of 7.1 percent in real terms in the April-June period. This was broadly in line with many economists’ forecasts.
Revised GDP data for the following quarter turned out to be minus 1.9 percent, falling short of the negative 0.5 percent forecast by economists.
After suffering from negative growth for two consecutive quarters, the economy fell into a technical recession, which cast doubt on whether Abenomics, a package of policies aimed at ridding the country of prolonged deflation and boosting economic growth, was working.
The Cabinet approved a new economic package worth ¥3.5 trillion on Dec. 27, but it didn’t impress Ueno, who is expecting a growth rate of 1.3 percent for fiscal 2015.
“They are small-scale measures,” Ueno said of the package, which allocates about ¥1.2 trillion to support small and medium-size businesses and households, ¥600 billion for promoting regional industries and some ¥1.7 trillion to help disaster-hit areas recover.
“I’m rather concerned the government may only end up wasting taxpayer money,” he said.
Ongoing efforts to get the economy out of deflation have also been overshadowed by dropping oil prices. A research team at Nomura Securities Co. estimates that the year-on-year rise in the core consumer price index, which rose above 1 percent in the October-December quarter in 2013 and turned south after peaking at 1.4 percent in April-June 2014, will decline to around 0.7 percent in April-June 2015, in levels excluding the boost from the consumption tax hike.
The Bank of Japan, which hopes to reach an inflation rate of 2 percent, stepped up its quantitative and qualitative monetary easing at the end of October. Meanwhile Abe put off another consumption tax hike, which would be a further drag on growth, from October 2015 to April 2017.
Daiwa Institute of Research economists said in a Dec. 10 report that they believe the latest recession has already ended, following two quarters of negative GDP growth.
They see a moderate economic recovery taking place in the last few months of 2014, and predict that it will continue to do so in 2015. The recovery will be supported by a virtuous cycle prompted by support measures from Abenomics and a moderate recovery in exports, particularly to the United States, where the economy has continued to show resiliency.
Consumer spending was blamed for the weak GDP figure in the July-September quarter. But corporate and household incomes have been recovering, pointing to the continued effects of Abenomics, according to Motoo Matsuoka, chief economist at the Bank of Tokyo-Mitsubishi UFJ Ltd.
Rising corporate and household incomes will likely help bring the growth rate to around 1.5 percent to 2.0 percent for the year ending in March 2016, he said.
Other economists point to consumer spending and corporate investment as drivers of the expected recovery.
Junya Morizane, an economist at Fukoku Mutual Life Insurance Co., sees various positive factors in the October-December period that will buoy consumer spending above levels seen in the previous quarter.
These include improvements in employment and household income, as well as a lack of adverse factors such as bad weather, a continued rise in stock prices, a drop in oil prices and an increase in year-end bonuses for salaried workers.
He also expects that the postponement of the next consumption tax hike will remove a negative psychological factor for consumers.
As for business spending, he says robust earnings are stimulating the appetite for fresh investment, prompting him to expect capital expenditures to begin growing again.
A weak yen and rising stocks, triggered by Abenomics and the BOJ’s aggressive monetary easing, are two recent trends that were accelerated by the BOJ’s additional easing in October. But while higher stock prices are seen as likely to improve consumer and business sentiment and support growth, the yen’s weakness may bring a different impact, they say.
That’s because exports, which have traditionally been the key driver of growth that benefited from the weaker yen, have failed to show solid recovery for a prolonged period even as the yen dropped and Japanese products became cheaper overseas.
On the other hand, the weaker yen boosts prices of imports, especially oil, which represents a significant share of Japan’s imports and is unlikely to decrease much despite the higher cost, some economists argue.
These new conditions prompted economists at the Japan Research Institute (JRI) to expect the weaker yen not to lead to an improvement in Japan’s trade balance, which remained in a deficit for the 29th consecutive month in November.
That said, a cheaper yen is expected to continue to support corporate profits. The JRI estimates that a 10 percent decline in the yen against the dollar could boost aggregate corporate pretax profits by some ¥1.3 trillion.
Another key area of focus for observers is whether Japan is able to make progress in shaking off deflation.
In a Dec. 19 press conference after the year’s last monetary policy meeting, BOJ Gov. Haruhiko Kuroda showed confidence in achieving the central bank’s inflation target of 2 percent in fiscal 2015.
But many economists agree that’s a difficult goal, and expect the BOJ will be forced to introduce additional monetary easing steps in 2015. They see deflationary pressure from slumping oil prices, which also lowers the cost of raw materials.
The BOJ’s current view, expressed in its Outlook for Economic Activity and Prices report released Nov. 1, is that the inflation rate is likely to remain in positive territory for a while and will eventually reach about 2 percent “in or around” the year ending March 2016.
In a report released Nov. 20, a research team at Nomura Securities Co. expressed the view that the core consumer price index, for all items except fresh food, will remain below 1 percent during the first half of fiscal 2015 and then rise to somewhere between 1 percent and 1.5 percent.
“It may be appropriate to expect more monetary easing to be introduced when the inflation rate becomes more likely to underperform the BOJ’s target,” the report says, calling into question whether the BOJ will achieve its goal.