Analysts from Mizuho Bank point out that trade tensions will be necessary to watch for its potential impact on Japan’s growth. They consider that if the US carries out its fourth round of tariff hikes on Chinese goods, they would send downward pressures upon the Japanese economy.

Key Quotes: 

“Japan’s real GDP grew +2.1% q-o-q p.a. in the Jan-Mar quarter of 2019, recording growth in positive territory for the second consecutive quarter. However, since the main factor pushing up growth in the latest quarter was the fall of imports accompanying the decline of consumption and capital investment, the state of the Japanese economy actually lacked strength. The growth of personal consumption, mainly of durable goods, came to a pause. Capital investment and exports dipped into negative territory, reflecting the slowdown of the Chinese economy and IT demand.”

“FY2019 forecast on Japan’s GDP: +0.5% q-o-q p.a. The global economic slowdown and lingering uncertainties regarding US-China trade tensions are serving as drags upon the growth of exports and capital investment. Despite the continuation of a favorable employment environment, personal consumption will likely be tepid due to a slight deceleration of income growth because of the reduction of overtime hours stemming from Japan’s work-style reforms. However, the impact of the consumption tax hike should turn out to be milder than the period from 2014 to 2015 due to the implementation of various income support measures.”

“FY2020 forecast on Japan’s GDP: +0.5% q-o-q p.a. The rise of adjustment pressures upon capital investment will serve as restraints upon GDP growth. Even so, the reactionary decline following the 2020 Tokyo Olympic Games should turn out to be benign, given the current delay in progress of construction due to the shortage of construction workers.”

“Turning to the risks, it will be necessary for the time being to keep a close eye upon the escalation of trade tensions. In the event the US carries out its fourth round of tariff hikes upon Chinese goods, thus triggering retaliatory measures, they would send downward pressures upon the Japanese economy, and could lead to the possibility of a postponement of the consumption tax hike.”