November 17, 2014, 12:00 JST

Weak GDP growth a blessing for Japan

The Japanese economy contracted by 0.4% quarter on quarter (QoQ) in the July-September quarter. The decline marks the second consecutive quarters of economic contraction, putting Japan into a recession. 

 Source: Cabinet Office, JMA.

While the result was much weaker than prior street estimates, it was not totally unexpected. Industrial production has a strong correlation with the GDP growth and it contracted in the July-September quarter by as much as 1.9% QoQ. See our comment we published on October 29. "Japanese manufacturers are officially in recession"

 Source: METI, JMA

In our view, there is no reasons to be depressed by the weak GDP growth in the July-September quarter. The Japanese government are already taking measures to boost growth, almost as if they knew the result in advance. The Bank of Japan's surprise easing at the end of October should provide substantial growth stimulus in the form of higher stock prices, lower interest rates and weaker yen. Prime Minister Abe is about to announce that he will postpone the consumption tax rate hike originally scheduled in October 2015, erasing one big dark cloud that was shadowing the economic outlook for Japan. 

We also like to stress that there are in fact sign of recovery in the Japanese economy. Retail sales grew for two consecutive months in August and in September, by almost 5 % cumulatively. Machinery orders indicate that Japanese corporate managers' appetite for capital investments are growing. 

 Source: METI, JMA

 Source: Cabinet Office, JMA.

If the weak July-September GDP growth prompted the BoJ and PM Abe to decide on adding stimulus, the weak growth was in fact a blessing for Japan. The cancellation of the sales tax hike in particular changes the outlook of the Japanese economy. Before the decision, we were expecting 2015 GDP growth to be as weak as 0.4%. In light of these government actions, we plan to revise up our growth forecast for 2015.  

For more details on the July-September GDP results, please see here.