Economic outlook dims for Japan

Notwithstanding some encouraging economic data, Japan’s Government downgraded its view on the country’s economy during May. Although a strong labour market, improving private consumption, and high corporate profits are providing support for Japan’s economic recovery, the US/China trade war is having an adverse effect upon export activity and industrial production.

  • Japan’s economy grew by a better-than-expected rate of 2.1% YoY in Q1
  • Australia’s Liberal-National Coalition retained control in May’s General Election
  • the Reserve Bank of Australia ereduced its forecasts for inflation and economic growth

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Japan’s economy expanded at an annualised rate of 2.1% during the first quarter of 2019. Imports declined more rapidly than exports during the period: imports fell by 17.2%, whereas exports declined by 9.4%. Meanwhile, manufacturing activity picked up to reach its highest level for three months in April, according to Nikkei-Markit, and business confidence in the sector rose to a five-month high.

“The US/China trade war is having an adverse effect upon Japan’s export activity”

Notwithstanding some encouraging data, Japan’s Government downgraded its view on the country’s economy during May. Although a strong labour market, improving private consumption, and high corporate profits are providing support for economic recovery, the US/China trade war is having an adverse effect upon Japan’s export activity and industrial production. Looking ahead, the Government recommended “further attention” to the global economic impact of the trade conflict. 

Earlier in May, the Cabinet Office said that Japan’s Index of Business Conditions had turned to “worsening” for the first time since January 2013, triggering concerns about the outlook and raising questions over the planned increase to consumption tax, which is scheduled to take effect in October. Over the month as a whole, the Nikkei 225 Index fell by 7.4%, the Topix Index dropped by 6.5%, and the TSE Second Section Index fell by 5.2%.

Australia’s Liberal-National Coalition retained power following May’s General Election. Prime Minister Scott Morrison remained in office, and the ASX All Ordinaries Index rose by 1.1% over May. 

However, the Reserve Bank of Australia (RBA) reduced its forecasts for inflation and economic growth and indicated that it was contemplating a cut in interest rates if the rate of unemployment does not continue to fall. The RBA last cut its key rate in August 2016 to its current record low of 1.5%. Inflation is expected to pick up to 2% early in 2020 and to “increase a little further” by mid-2021. The central bank downgraded its forecast for economic growth this year from 3% to 2.75%. 

A weakening housing market is undermining household consumption; retail sales volumes fell at a quarterly rate of 0.1% during the first three months of 2019, posting their first negative quarterly reading since 2012. Falling house prices are the principal risk to Australian credit markets over the next 12 months, according to credit ratings agency Fitch, which found that most fixed-income investors believe that property prices will continue to fall this year.


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