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Japan reported its seventh successive quarter of economic growth on Wednesday, marking the country’s longest growth streak since the turn of the century.
While the headline figure suggests Shinzo Abe enters his third straight term as prime minister with the economy in a healthy position, the underlying numbers weren’t all so rosy, so here’s three more key charts to help understand the data, and whether the run is likely to continue.
Although the quarterly expansion of 0.3 per cent was solid, it was lower than many analysts had expected, and would have been even worse but for strong demand in the rest of the world. Exports climbed healthily over the period, but domestic consumption actually declined for the first time since 2015, while figures for the second quarter were also revised downward.
However, Freya Beamish, chief Asia economist at Pantheon Macroeconomics, suggested the downturn was not a cause for alarm. She said the pace of expansion earlier in the year was “unsustainable”, but the extent of the decline in three months to September was exacerbated by a drop in mid-year bonuses, meaning growth “should come back onto an even keel in the fourth quarter” and “private consumption should soon be back on a stable footing”.
Investors will certainly be hoping that is the case. Japanese stocks fell back after this morning’s data were released, but have still outperformed most of their international peers so far this year.
They rallied hard in the run-up and immediate aftermath of Mr Abe’s election win, with foreign investors pouring into the stock market at the fastest rate on record last month. The Nikkei 225 index set a record-breaking 16-day winning streak in October, and last week the broader Topix index hit its highest intraday level in more than 25 years.
The Topix has tested the 1,800 level a number of times in the intervening decades, but each time has struggled to lift the so-called “iron coffin lid” for long. However, investors are betting that that Mr Abe’s strengthened mandate will allow the government to double down on the fiscal and monetary stimulus policies that have helped to lift corporate earnings this year.
The long-term goal of those policies is to pull Japan out of its decades-long deflationary spiral, and today’s data provided encouraging signs that things are moving in the right direction. The GDP deflator – a measure of inflation used to determine real GDP growth – rose to 0.3 per cent, its strongest level since the start of 2016 and the first positive figure of the year.
With the headline inflation rate currently at 0.7 per cent, there is still a long way to go to hit the Bank of Japan’s 2 per cent target. But after such a long run of growth above the economy’s long-term potential rate, capacity constraints should soon start to bite.
After spending most of last year in deflationary territory, producer price inflation – an early gauge of price pressures that are liable to be passed on to consumers later – has climbed to 3.4 per cent, and Ms Beamish says “inflation should start to edge up” as soon as pipeline pressures feed through.
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