Positive Japan-United States
The positive tone at Prime Minister Shinzo Abe’s summit with President Donald Trump eases concerns about Japan’s growth outlook and reduces political constraints on its central bank. Earlier comments from Trump had raised concerns for Japan on trade, the yen and security commitments. None of those concerns materialized at the event, which went off without a hitch. Even so, the U.S.–Japan trade imbalance isn’t going away, which means U.S. pressure for yen strength might return in the months ahead.
Here are the key points from the joint-press conference and statements after the meeting:
- Post TPP, the two leaders agreed on pursuing fair and rules- based trade and investment. Trump didn’t call for a bilateral free trade agreement between the two countries.
- New trade and investment talks, led by Vice President Mike Pence and Japanese Deputy Prime Minister Taro Aso, will start. The talks will also cover fiscal and monetary policy.
- Exchange-rate policies weren’t included in the joint statement.
- Trump called Japan a “steadfast ally” and thanked Abe for hosting U.S. military forces, not mentioning the cost of the U.S. base in Japan.
The absence of discussion on a bilateral trade agreement between the Japan and the U.S. is a positive for Japan. While the multilateral TPP was set to be a positive for Japan, the fear was that the U.S. could have used a bilateral deal to extract unequal concessions – especially on autos and agriculture.
Looking further forward, the U.S. withdrawal from TPP is likely to weigh on the Japan’s exports in the medium- to long term.
Japan’s Cabinet Office released 4Q GDP data on Feb. 13. The consensus forecast points to growth slowing to 1.1% quarter on quarter, seasonally adjusted and annualized, from 1.3% in 3Q. This would be above potential (estimated around 0.8%) — reducing slack in the economy and stoking inflation.
Stronger exports and moderate increases in capital expenditure and housing investment likely drove growth. Declines in public investment and private inventories may have been a drag. Consumption was probably unchanged but could surprise either way, depending on how a surge in fresh food prices and the effects of deflators play into the data on a real basis.
Exports rose 2.6% from the previous quarter and imports also increased 1.3%. A stronger U.S. household sector and stabilization in China’s growth should both be positives for Japan’s export outlook, if trade tensions can be avoided.*Net exports contributed 0.2 percentage point to 4Q non-annualized, quarter-on-quarter growth, after expanding 0.4 percentage point in 3Q.
Weak Yen and Low Rates Likely to Support Investment in Japan.
Japan’s private non-residential investment is likely to increase 1.9% in 2017 and 0.5% in 2018, following a 0.8% rise in 2016. Stronger industrial output this year – driven by a recovery in exports on the weaker yen and rebuilding of inventories – is likely to drive the pickup in capital expenditure. Low borrowing costs will provide a positive backdrop.
Japan’s Inflation to Edge Up on Weak Yen and Stable Oil
Japan’s headline consumer prices are likely to rise 0.4% in 2017 and 0.9% in 2018, rebounding from a 0.1% drop in 2016. The moderate increase in price pressure reflects a number of factors, including a weaker yen.
Growth above potential will nearly eliminate slack in the economy. Wages are expected to register a slight increase, reflecting low unemployment.
Oil prices are expected to rise following an agreement by OPEC and non-OPEC producers to reduce supply.
This could relieve some deflationary pressure. Still, even if consumer prices start to trend upward in 2017, the BOJ’s target of 2% inflation by March 2019 still looks like a high hurdle.
▼ Economic Forecast for Japan
Source: Bloomberg 15 Feb 2017
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