Consumption to buoy Japanese growth in 2016

By Taylee Lewis
 — 1 minute read

The Japanese economy looks set to side-step the effects of deteriorating Chinese demand, says HSBC Global Research.

In a recent research update, titled Asian Economics: Hang in there, HSBC Global Research said the 2016 outlook for Japan has “turned more optimistic”.

The report argued that Japan's consumption recovery will become more “broad-based” throughout the year, with stronger household spending expected. HSBC indicated that wage growth is likely to accelerate and the unemployment rate forecast to drop below three per cent. 


According to HSBC, year-on-year GDP growth is expected to increase from 0.7 per cent in the second quarter of 2015 to 1.1 per cent in the second quarter of 2016. By the first quarter of 2017, GDP growth is likely to reach 2.2 per cent. 

The report also argued that the Bank of Japan (BoJ) is unlikely to implement further easing.

“While growth and inflation have fallen short of the central bank's optimistic forecasts, the BoJ is encouraged by the continued strength in labour markets and sees the underlying reflationary trend as intact,” the report stated.

“The government's desire for a stable currency also means there is little political pressure on the BoJ currently to ease policy. Our base case is that the central bank will refrain from taking additional easing action.”

For investors looking to Japan, HSBC signalled that a major risk for Japanese equities stems from renewed market turbulence and a subsequent, and significant, appreciation or fall in equities.

“This would depress exports and capex, dragging Japan into recession,” according to the report.

HSBC also warned investors to brace for a possible VAT hike in April 2017, with the government likely to increase the rate from 8.0 per cent to 10 per cent.

While GDP growth is forecast to have risen by this point, HSBC expects that the VAT increase will bring GDP growth down to 0.5 per cent in the second quarter of 2017, before declining to -0.7 per cent by the fourth quarter. 

Moreover, the report also noted the expectation of subdued growth across Asia in 2016.

“Exports are unlikely to rebound amid lacklustre global demand, and investment looks set to cool further.”

To combat slowing productivity growth and weak investment confidence, HSBC said Asian economies will need to implement further structural reform.

“The pruning of state-owned company privileges, lower trade barriers especially for services, greater spending on infrastructure and less on subsidies … just to name a few.

“So far, progress has been slow in all of these areas, whether in China, Japan, India, Indonesia, or every place in between,” HSBC stated.

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