May 20, 2015, 13:30 JST

BoJ needs more robust growth to avoid QQE3

The Japanese economy grew by 0.6% in the January-March 2015 quarter, according to the preliminary estimates published by the Cabinet Office on May 20. The result was slightly better than what forecasters had expected. A survey by Reuters showed that economists on average were forecasting to see 0.4% growth.


The better than expected growth suggests that the Japanese economy is steadily recovering from the stagnation it suffered in 2014. The Japanese economy shrunk as much as 2.3% in the 6 months following the sales tax hike in April 2014. However, since October, the economy seems to have returned to a steady growth path, growing by 0.3% in the October-December 2014 quarter, and then by 0.6% in January-March 2015.

By components, we see that private consumption keeping up the pace of 0.3-0.4% quarterly growth in the last three quarters. Private capital expenditure grew by 0.4% in the January-March quarter, the first growth in the last 4 quarters. Residential investments are also becoming robust again, growing by 1.8% in the quarter. 



While we welcome the positive growth in the recent quarter, we cannot help but feel a sense of lost opportunity for Japan in the last 12 months. Despite the recovery in the last two quarters, the level of economic activity in the January-March quarter is still 1.4% below the level a year ago.



If not for the consumption tax rate hike in April 2014, the Japanese economy would have kept growing and we should have seen an emergence of moderate inflation by now. Instead, Japan experienced a disinflation in the last 3 quarters. The domestic demand deflator has been slowing down from 2.5% year on year in April-June 2014 to 1.4% year on year in January-March 2015. This is exactly what we feared back in early 2014. See our report "Feeling melancholic for Abenomics"



In the last monetary policy meeting on April 30 2015, the BoJ announced that it gave up achieving their inflation target in the fiscal year 2015 and postponed the deadline to the first half of the fiscal year 2016. While we think there is still a good chance that the BoJ could achieve it without additional policy measures, any unexpected negative shock in the coming 12 months could undermine this chance. Unless we see an evident signs of inflation in the next 6 months, the BoJ should probably implement an additional easing in order to ensure that its inflation target would be reached in 2016.