Moody’s Sees Improved Outlook for Japan’s Economy

Recent data releases from Japan are credit positive, because a stronger Japanese economy would increase tax revenues and facilitate steps toward fiscal consolidation, including a planned hike in the consumption tax in April 2017, says Moody’s Investors Service.

The credit ratings agency (CRA) notes that on 8 June, Japan’s government announced that the economy had expanded at an annualized 3.9% in the first quarter of 2015 – a much faster pace than it previously reported, following figures indicating a modest pickup in wage growth.

While the latest gross domestic product (GDP) figures highlight consumption as a continued weakness, wages appear to be slowly rising.

The latest data, showing 3.9% growth in Q115, follow preliminary estimates of a 2.4% increase. The figure is also significantly stronger than a 1.2% expansion in Q414, which followed two consecutive quarters of contraction.

Moody’s comments that a rise in inventories and a pickup in private non-residential investment provided significant contributions to the latest acceleration, an indication of growing corporate confidence. Exports supported the rise in output.

Recent government and trade-union data also suggest that Japan’s wage growth may finally be starting to gather momentum, highlighting the potential for a gradual increase in consumer demand. However, the government will likely want to see more conclusive evidence if it is to go ahead with a second delayed hike in the consumption tax to 10%, and any subsequent increases.

The CRA also notes that an update to Japan’s medium-term fiscal and growth plan later this month may provide insight on the feasibility of the government’s goal of achieving a primary budget surplus by 2020.

The route to that benchmark is based on projections that the economy will grow 3% in nominal terms or 2% in real terms over the medium to long term. In this context, Moody’s believes that sustained robust expansion is unlikely without a strong package of growth-enhancing structural reforms over the medium term. In the meantime, the CRA forecasts that real GDP growth will pick up to 1.5% in fiscal 2016, from 0.5% in fiscal 2015.


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