Deflation will persist in Japan despite steady growth

Subject

Japan's macroeconomic outlook.

Significance

GDP grew 0.5% (annualised) in the fourth quarter (October-December) of 2017. This was the eighth consecutive quarter of growth, the longest such stretch since 1989. Household consumption, business capacity expansion and vibrant foreign markets were countered by even stronger imports, government spending declines and falling housing construction. A tight labour market has not yet yielded consistently rising wage rates or longer hours.

Impacts

• Japan's commitment to quantitative easing and negative interest rates as rates rise elsewhere will contribute to currency depreciation.
• A depreciating currency and strong global growth will drive Japan’s exports.
• The annual spring wage negotiations will garner much media attention, but will not affect economy-wide wages very much.