Lonsec   ⟩   Articles   ⟩   News   ⟩   Japan’s output gap is narrowing, but price pressures are still non-existent

AuthorLukasz de Pourbaix

TitleChief Investment Officer, Lonsec Investment Solutions

DateFebruary 4, 2019

CategoryNews

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Despite the longest economic expansion in the country’s post-war history, few at the Bank of Japan would be celebrating. While official statistics indicate that the output gap is improving, inflation remains stubbornly low, forcing the Bank to maintain its stimulus program for longer than expected. Members voted in January to maintain the short-term interest rate target at 0.1% and lowered its inflation forecast for the fiscal year ending March 2019 from 1.4% to 0.9%.

Underlying price pressure is still weak despite an improving output gap

Source: Bank of Japan, Lonsec

Japan’s September quarter GDP growth was revised down to a contraction of 2.5% annualised from an initially reported fall of 1.2%. The downturn has been linked to a string of natural disasters, including flooding in July, a typhoon in September, and an earthquake in Hokkaido, all of which has affected exports and tourism.

The rise in the sales tax from 8% to 10% is due to come into effect in October 2019, and while it might provide an initial boost in consumption it is likely to prove crippling to consumer demand in the medium term and risks pushing the economy into recession (which is exactly what previous increases achieved). If there is any good news, it is that a rebound in business investment is likely to contribute to a recovery in the March quarter of 2019, but even a recovery could be vulnerable to the global slowdown.

For more information contact:

Gordon Toy
03 9623 6373
Gordon.Toy@lonsec.com.au

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