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The end of 2022 to early 2023 saw the Japanese economy expand as it reopened post the pandemic. However, after that, there has been a certain level of stagnation, as per the latest GDP data.
Although the contraction in GDP means that Japan has slipped behind Germany and is now the world’s fourth-largest economy, preliminary figures released by Japan’s Cabinet Office suggest that the country’s nominal growth rate has overtaken that of China for the first time since 1977.
“Newly deflationary China saw nominal growth of 4.6%, while Japan posted 5.7%, in yet another sign that the country is finally escaping the deflationary spiral of recent decades,” said Hiro Kasai, Senior Strategist at Tokio Marine Asset Management.
The asset manager noted that BoJ governor Kazuo Ueda has consistently stated that the Japanese economy needs to achieve sustainable inflation (specifically, a virtuous cycle between wages and prices) before the central bank makes the final move toward normalisation.
“But past performance is famously not a reliable indicator of future returns, and markets don’t appear to see this past GDP data as having a significant impact on the future timing of the BoJ lifting its negative policy rate,” Kasai explained.
That said, Tokio Marine believes that despite weak October-December GDP data was disappointing, wage and CPI data was encouraging enough to support market confidence in the Japanese economy. The asset manager further indicated that the BoJ stays on course to normalise and expects an end to negative interest rates at the April policy meeting.
Speaking about the Japanese stock markets, Tokio Marine expects a slowdown in February in sharp contrast to the market rally in January. The FY23 supplementary budget includes allocations for inflation relief, domestic capex subsidies, as well as other measures likely to boost consumer spending and corporate capex.
“However, higher product prices due to the weak yen and rise in commodity costs, along with dwindling benefits from economic normalisation, run the risk of slowing consumer spending, while the Japanese government could fall into disarray as its support ratings take a dive amid political funding scandals,” warns the asset manager. Tokio Marine feels these concerns and caution over the year-to-date share price surge could weigh on domestic stock markets.
Meanwhile, trends to watch out for on the international stage include drags on consumption and capex amin monetary policy tightening in Europe and the US. China’s economic slowdown; higher sea freight rates; and geopolitical risks would add to the woes.
“With October–December earnings announcements shifting into full gear from late January, persistent sluggishness in China’s economy and a potential uptrend in the yen pose a concern, but we expect earnings support from economic reopening, and the dropout from H2 of drag from terms of trade deterioration,” foresees Tokio Marine.
