Japan remains the world’s third largest economy behind that of the USA and China, but it continues to have to deal with anaemic economic growth, the negative consequences of a “safe haven” currency and broadly stagnant or declining prices. At the outset of 2016, the Dollar bought 120.6 Yen; currently it is buying 109.5 Yen, meaning that Japanese goods priced in Yen are more expensive in importing markets.
Data just released shows that the Japanese economy expanded by 0.4% in Q1 of 2016 and reversing a contraction of equal magnitude that was experienced in Q4 2015. Analysts had been predicting much more modest growth (well, everything is relative) of 0.1%, so the actual growth was much better than anticipated. The better performance has been credited to increased governmental spending, strong exports (despite the currency problems during the quarter as investors bought the Yen on Chinese growth and weak oil price worries) and better private consumption. The growth is slightly below the long-term quarterly expansion average of 0.48% which is based on all data from 1980 until the current year. The best ever quarterly growth came in at 3.2% (Q2 1990) and the worst contraction seen was -4% (Q1 2009).
Business investment in the quarter was down by 1.4% indicating weakness in business confidence. Stock markets in Japan were largely unchanged on the news of the Q1 data.
In an effort to inject low, positive, inflation into the economy, the previous government had started the process of increasing sales tax to 10% in stages. The current government postponed the hike from 8% to 10% and there is speculation that it will be further delayed to avoid harming consumer demand. Approximately 60% of Japanese output is consumed by the domestic market. The reason why the government decided to increase sales tax in the first place was to try to draw a line under more than 20 years of deflation which has been blamed for stifling consumer demand as people delay significant purchases for as long as possible against the knowledge that the items will be cheaper when eventually made.