Economic Outlook 2017: Japan

Fueled by fiscal stimulus measures and a depreciating yen following the U.S. presidential election, the Japanese economy is expected to grow moderately in 2017, albeit with downside pressure persisting in public debt and wage growth.

The Organization for Economic Cooperation and Development warned in November 2016 that faster economic growth was essential to help Japan stabilize its public debt, expected to reach 240% of GDP by 2018.

“Japan should hold up better, at least by its standards, delivering above 1% growth this year,” according to a January forecast by Frederic Neumann, co-head of Asian economics research, and his colleagues at HSBC in Hong Kong. The bank noted that a ¥28 trillion fiscal stimulus is shoring up local demand.

“Business confidence has improved and investment seems to have bottomed,” Neumann added. “Consumers aren’t exactly splurging, but spending is holding up, and if things stay steady for a while longer, they could easily step things up, given their healthy saving rates of late.”

Meanwhile, a weakening currency has boosted exports. “The yen is the worst-performing G10 currency since the U.S. election in November,” Eric Robertson, head of global macro strategy and foreign exchange research at Standard Chartered Bank in Singapore, noted in a January 5 research paper.

“External risks are largely to the downside, given uncertainty about China, which accounts for a quarter of Japanese exports,” the OECD said in a recent report.

Despite optimism that potential U.S. economic growth led by large-scale tax cuts and infrastructure spending would have positive knock-on effects on Japan’s economy, Takuji Okubo, managing director and chief economist at Japan Macro Advisors in Tokyo, was skeptical.

“The new administration [of U.S. President Donald Trump] would face major roadblocks in implementing an expansionary fiscal policy and such a tailwind for Japan will not materialize,” he said.

Okubo also noted that a trade war between U.S. and China, or potentially between U.S. and Japan, would have “a material negative repercussion” to Japan’s economy.

The possible cancellation of the proposed Trans-Pacific Partnership, one of Prime Minister Shinzo Abe’s pillars of growth, is a disappointment for Japan, although other regional or bilateral agreements could offset its absence.

Another major concern is wages growth, which is an important stimulus for domestic demand but remains sluggish despite high corporate profitability and a growing labor shortage.

Growth data for the third quarter of 2016 showed that domestic demand was flat. “The unemployment rate has fallen to 20 years low, but there is no sign that the tight labor market is causing wages to rise,” said Okubo, “Whether we see any rise in wages would be a key domestic factor.”

Liya Fan is a master's degree candidate at the University of Hong Kong's Journalism and Media Studies Centre.