Japan: Difficult beginning to the year…

Indicators have deteriorated since the beginning of the year. First, PMI manufacturing indices fell continuously from January to, finally, 49.1 in March. Second, the latest main quarterly survey from the Bank of Japan – the Tankan – has slightly deteriorated since Q4 2015 and firms are forecasting a further deterioration in Q2. Indeed, firms are feeling the brunt of the recent appreciation of the yen (by nearly +10% over one year – chart 1), the slowdown of Chinese and emerging countries growth and the plunge in the stock market. 

As a result, the developments of the beginning of the year have probably weighed on the negotiations between Rengo (the unions) and Keidanren (the employers). Indeed, the latest figures point to wage increases of around +0.5% against +0.8% last year. Moreover, these developments have led firms to become cautious about new investments. Core capital goods orders and production capacity indicators barely moved in Q1… even if the share of profits in GDP is near an all-time high (chart 2). 

Nevertheless all is not doom and gloom. Indeed, non-manufacturing companies' business conditions indices (from large to small) have declined less or even slightly risen. This can be partially explained by the still buoyant labour market. The unemployment rate is hovering around 3.3%, firms continue to offer new jobs and the weak demographics will tighten the labour market. This should push wages higher, even with the measures promoted by Shinzo Abe to increase the participation rate of women (chart 3). 

All in all, GDP growth should remain weak in 2016: around +0.5%. This has prompted the government to frontload budget expenditures (in the first half of FY16) and the Bank of Japan to further ease its monetary policy by pushing its rates into negative territory. In this context, the increase in VAT announced for April 2017 might be postponed if growth does not pick up more materially.