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Is Japan’s growth spurt really that surprising?

Fathom Consulting

18 Aug 2017

Photographer: Eriko Sugita
Photographer: Eriko Sugita

Japan’s fastest expansion in more than two years — as revealed in forecast-beating GDP figures this week — didn’t come as a complete surprise to Fathom Consulting and its clients.

All commentary and opinion is that of Fathom Consulting and any views expressed are not those of Thomson Reuters.

Japan’s Cabinet Office takes up to seven weeks after the quarter-end to publish its preliminary GDP estimate, making it the last of the ‘Big Four’ to do so.

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Despite the delay, they also makes the largest revisions to that initial estimate.

With that in mind, and recognizing that the data is unreliable, Fathom have expanded their suite of proprietary indicators to include a Japanese Economic Sentiment Indicator (ESI).

That, as Fathom recently highlighted to its clients, pointed to an upswing in economic activity that was yet to be reflected in the hard data.

On 14 August, the Cabinet Office announced that Japan’s economy grew by an annualised 4.0 percent in the second quarter of 2017, exceeding the consensus estimate of 2.5 percent and close to the rate implied by Fathom’s ESI.

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China demand

Fathom’s ESI, which uses a technique known as principal component analysis to distill information from numerous consumer and business surveys, first started to diverge from Japan’s official GDP numbers in the middle of last year.

China's President Xi Jinping (R) shakes hands with Japan's Prime Minister Shinzo Abe. Photographer: Kim Kyung-Hoon
China’s President Xi Jinping (R) shakes hands with Japan’s Prime Minister Shinzo Abe. Photographer: Kim Kyung-Hoon

That appears to have been driven by improving corporate sentiment, related both to a weakening yen and increasing demand from China.

Indeed, Japan’s export growth to China has picked up sharply since the world’s second-largest economy began ‘doubling down’ at the beginning of 2016.

Rising optimism

The coveted depreciation of the yen since last November, motivated by expectations of policy divergence and a more ‘risk on’ environment, also appears to have contributed to improving business sentiment.

Japan in Chartbook
Japan in Chartbook

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This week’s provisional GDP estimate suggests that both business investment and household consumption drove growth in the second quarter, with net trade exerting a small drag as export volumes fell by 1.9 percent.

On the surface, that is at odds with survey-based data, which continue to point to rising optimism among firms, particularly manufacturers.

Nevertheless, that optimism does appear to have fed through to investment, which rose 11.7 percent on the quarter, contributing 2.6 percentage points to quarterly, annualised GDP growth.

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