- Japan’s economic momentum was falling away even before sales tax hike…
- …setting the scene for BoJ monetary easing in coming months
- ECB policymakers make dovish comments in the run up to March meeting
Tepid GDP growth in Japan…
Japan’s Prime Minister Shinzo Abe has tried to revive the economy, through a mix of aggressive fiscal and monetary stimulus, commonly known as Abenomics, with the third pillar – structural reform – still missing. At the start, the results of the more aggressive policy stance were dramatically positive. However, economic growth has more recently started to disappoint, even before the planned sales tax hike. In the first two quarters of 2013, the economy grew strongly surging by 4.7% and 3.9% qoq on an annualized basis, respectively. But in the third quarter growth fell to 1.1%. According to preliminary data released yesterday growth weakened even further to 1% in the fourth quarter (consensus: 2.8%). Domestic demand is not doing too badly. Private consumption, government spending and corporate investment were up respectively by 2%, 1.9% and 7.8%. Having said that, consumer spending has slowed sharply compared to earlier in the year. The relative strength in domestic demand is accompanied by strong import demand. Imports grew by 14.1%. Exports are lagging, growing a modest 1.7%. This is sharply lower than earlier in the year. The combination of high import and low export growth led to net exports being a drag on economic growth, suggesting that some of the early gains from the slide in the yen are dissipating. Furthermore, expectations are that domestic demand growth will slow due to the sales tax hike in April. In the run-up to the adjustment consumers bring forward the purchase of durable goods like cars. After April consumer spending is expected to grow more slowly. Meanwhile leading indicators hint at slowing growth of corporate investment.
…signals coming of Abenomics part two
The government has already planned fiscal measures to help cushion the blow of the sales tax hike though these are unlikely to do the trick and we think that the slowdown in the economy adds to the case for a stepping up of BoJ monetary stimulus in coming months, which will lead to a new downward leg for the Japanese yen.
Dovish comments from the ECB
Communication from ECB policymakers had a clear dovish tilt yesterday. The day began with reports of comments from ECB Executive Board member Benoit Coeure. He said that the central banks was ‘very vigilant’ to downside risks to the inflation outlook. He noted that inflation was ‘closer to the area where inflation expectations could be altered and create downside risks to price stability’. He added, just for good measure, that the ECB would ‘not hesitate to take further decisive action if required’. Meanwhile, the Austrian central bank Governor and ECB Governing Council member Nowotny also struck a relatively dovish note. He hinted that the ECB’s new inflation forecast – to be published in March – may show inflation below the 2% level in 2016 and that ‘might be an argument to do something to get closer to the price stability goal’. In separate comments, he said he was sceptical about negative rates and that some kind of intervention in ABS markets was ‘an option’. These statements are consistent with a good chance of policy action from the ECB in March. Meanwhile, the Bundesbank has officially made its support known for of one of the key policy options. In its Monthly Report it said it was ‘open to a potential adjustment of current liquidity absorbing operations’ used to sterilize the SMP. We think this is an action the ECB will take before long, which should push up the liquidity surplus and put downward pressure on short-term interest rates.