The Japanese government will today halve its economic growth forecast for this year, and set in train a new round of stimulus from the newly expanded Abe administration, and/or the Bank of Japan.
The cut to the growth estimate will come three days after Prime Minister Abe expanded his control of the two hours of Japan’s parliament, clearing the way not only for a number of changes to social and public policy, but also a new round of spending. Japanese investors though will ignore the forecast cut (and other weak data) and continue to push up prices in Tokyo.
The yen has weakened quickly, from just over 100 yen to the US dollar late last week to more than 103 yen yesterday. The Nikkei 225 index has jumped more than 6% in the past two days with yesterday’s 2% plus rise.
Investors will see the cut to the GDP growth forecast as adding to the likelihood the government will reveal more spending (and to heck with the debt).
Mr Abe’s cabinet was reportedly due to start talks on a new stimulus plan yesterday (those plans would have been drawn up by bureaucrats in expectation of Abe’s win in the upper house elections on Sunday).
The government will announce today that the 2016-17 growth estimate has been cut from 1.7% (issued in January), to just 0.9%.
The revision is partly due to a decision announced in June by Mr Abe to push the final sales tax increase to 2019 from the previously scheduled April 2017. That 2% increase had been originally due to occur in late 2015, but was pushed out to 2017 and now two years later.
The first increase happened in 2014 and saw the sales tax rate rise from 5% to 8%, a move that dragged forward spending, especially retail sales and then triggered a small recession in succeeding quarters.
Government forecasters had had previously assumed that consumers would repeat that spending splurge and buy goods and services aggressively before items became more expensive with the higher tax rate, at the start of next April.
That would have dragged forward the extra spending into the March quarter of next year.
On top of that, government forecasters have reportedly (according to Japanese media) cut back on estimates for exports and global growth (especially in the EU) caused by the higher uncertainty in the wake of the Brexit vote.
The growth forecast for the 2017-18 year is like to be set at 1.2%. Investors confident of the new round of spending ought to keep a close eye on what is happening in China. The country’s trade data for June and the first six months of the year will be released later today, while the June quarter GDP figures will be out on Friday and are tipped to hit a six year low of 6.6% (annual rate) for the quarter.
Yesterday though, China’s central bank guided the value of the yuan to its weakest level in more than 5½ years. The yuan’s reference point was set at 6.6950 against the US dollar, the highest level for the dollar since October 2010. The size of the devaluation in China keeps growing.
Chinese investors are also expecting more stimulus spending, but the gradual depreciation of the yuan is also a form of stimulus for Chinese exporters. Japanese investors expecting the weaker yen to boost export returns had better be aware of what China is doing. The party might be over before it started.
Analysts are expecting the People’s Bank of China to ease policy again soon, but the slide in the value of the yuan might be enough.
