Article / 17 February 2014 at 9:15 GMT

Japanese growth splutters despite uptick in consumer spending

• Q4 growth slows to 0.3%, way below consensus' 0.7%
• Implied growth of 1.6% for 2013 as a whole
• Lack of structural reforms undermining growth prospects

By Mads Koefoed

Bottom line: The Japanese economy disappointed in the fourth quarter by printing just 0.3 percent quarterly growth driven by net exports and investment while consumption accelerated. While growth should be reasonably strong this year as well, the lack of structural reforms is a cause for concern in the longer term.


Details: Economic output rose 0.3 percent quarter-on-quarter in the fourth quarter, similar to Q3, but below the consensus expectation of 0.7 percent. This implies growth of 1.6 percent in 2013, up slightly from 1.5 percent in 2012.

Among the drivers of weaker-than-expected growth were investments, both in capital and residential, which climbed 1.3 and 4.2 percent from 1.8 and 10.5 percent respectively. This implies contributions of 0.1 and 0.2 percentage points respectively. Furthermore, net exports dragged growth lower with a -0.5 percentage point contribution due to an increase of imports of 3.5 percent while exports rose just 0.4 percent. Consumption, both private and public, rose faster in Q4, however.


Japan's economy may be slowing to an alarming degree as Shinzo Abe's third arrow of structural reforms falters. Photo: egadolfo \ Thinkstock

Economic growth of 1.6 percent may be twice the average of the last ten years and the envy of many a country in Europe, but it is nevertheless below expectations coming into 2013 and the prospects for 2014 are not any brighter. To the contrary I expect growth to weaken to 1.4 percent this year (consensus: 1.5 percent) led by consumers struggling to cope with the increase in the consumption tax sceduled for April and the fading impact of last year's stimulus packages. 

Weaker growth in private consumption this year is not my primary concern, however. The lack of reforms — structural reforms is the third of Abe's three arrows — remains the key issue. Progress on labour market reform and deregulation is moving particularly slowly. While higher global growth this year should counter some of the domestic weakness by aiding Japanese exporters, I expect the economy to slow to growth of 1.4 percent this year and potentially even further in 2015.

Mads Koefoed is head of Macro Strategy at Saxo Bank. Be sure to follow Mads here for all of his daily social community commentary or to copy his daily trade views.


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