Japanese GDP Returned to Positive Growth in 4Q but to Only a Weak Extent

February 15, 2015

Real GDP growth last quarter of 2.2% annualized from 3Q was only three-fifths as much as street expectations and followed negative growth of 6.7% in the second quarter and 2.3% in the third calendar period.  Real growth in 2014 was zero compared to a U.S. growth rate of 2.4% and even below the eurozone’s 0.9% pace.  Relative to those other economies, 2014 was Japan’s worst performance since 2011.

GDP, % 2014 2013 2012 2011
Japan 0.0% +1.6% +1.8% -0.5%
U.S. +2.4% +2.2% +2.3% +1.6%
Eurozone +0.9% -0.5% -0.7% +1.6%

Japanese real GDP last quarter was 0.5% lower than a year earlier, a deterioration of 2.8 percentage points (ppts) from the four-quarter advance of 2.3% between the last quarters of 2013 and 2014.  Nominal GDP, by contrast, decelerated just 0.2 ppts to 1.8% in the four quarters to 4Q14 from 2.0% in the year to 4Q13.  The 3-ppt hike of Japan’s sales tax, effective last April 1, lifted inflation by less than three ppts and, like the previous consumption tax hike in 1997 had a negative impact on real economic activity.  Japan’s GDP price deflator slipped 0.3% between 4Q12 and 4Q13 but rose 2.3% between 4Q13 and 4Q14.  Moreover, the weakness of the economy last year generated decelerating momentum in inflation.  Between the third and fourth quarters of the year, the GDP price deflator only climbed 0.5% at an annualized rate.  The GDP price deflator’s 1.6% advance in 2014 was the first calendar year increase of any size since 1997.

The engines of economic growth last quarter were net exports, which accounted for 0.9 ppts of the 2.2% annualized recovery in real GDP, and private business inventories, which augmented growth by an additional 0.7 ppts.  Personal consumption, which after an 18.8% collapse in the second quarter and a rebound of just 1.0% annualized in 3Q, rose only 1.1% further in 4Q.  Personal consumption in 2014 as a whole exerted a 0.8 percentage point drag.  Among other components of aggregate demand last quarter, residential investment (down 4.8% on quarter and 15.7% on year) posted a third consecutive quarterly drop.  Non-residential business investment edged up just 0.4%, not enough to fully reverse the third quarter’s 0.6% dip, and that left such a mere 0.1% larger than in the year-earlier quarter.  Public-sector demand accounted for just 0.1 ppt of GDP growth last quarter.

Conceptually, Japanese national income accounts highlight that sharp yen depreciation, an inevitable by-product of massive quantitative monetary stimulus, has been the overwhelming channel through which Abenomics is impacting the economy.  It took much longer than expected for exports to respond, but after sliding 0.4% in 2011, then another 0.2% in 2012 and rising just 1.5% in 2013, they grew by 8.2% in 2014 and 11.4% between 4Q13 and 4Q14.  In 2014, personal consumption and housing contracted, and growth of 0.9% in public-sector demand was only about half the pace over the prior two years.  Japan is fortunate that the Group of Twenty nations has explicitly felt that its pursuit of monetary stimulus to eradicate deflation is appropriate and that the collateral sharp decline of the yen is understandable and does not constitute a deliberate manipulation of the currency to gain competitive advantage against other economies.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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