The Japanese Economy Grew Faster Than Expected. Enough to Support the Japanese Bull Run?

Despite earlier estimates of 1.6% growth made last month, Japan’s economy experienced even stronger expansion in the first quarter of the year, with an annualized growth rate of 2.7%. However, there are concerns among some economists that the observed resilience in the Japanese economy might only be temporary.

Meanwhile, as the Nikkei 225 reached a new all-time high today, surpassing 33,000 points, traders and analysts are raising questions about the sustainability of the current bull run in light of Japan’s prevailing circumstances.

Significant Upward Revision in Japan’s GDP

Statistics show Japan’s economy expanded more quickly than predicted in the first quarter of 2023, as businesses upped their spending and corporate investment grew. It’s a mostly positive result, showing that despite the global economic downturn, the Japanese economy is fairly resilient, with enough private spending to maintain growth.

GDP grew at an annualized rate of 2.7% in the January-March quarter compared to the last three months of 2022, according to revised data released by the Cabinet Office on Thursday. This surpassed both the initial reading of 1.6% and the economists’ forecast of 1.9% expansion.

Important to note, however, is the fact that rising inventories were partly responsible for the stronger growth figures. This would indicate that demand is falling short of output and may mean that these positive results could be short-lived since consumer spending power was also lower than first expected.

As corporations continued to hike prices in April, core consumer inflation reached 3.4%, casting doubt on the BoJ’s prediction that inflation would fall down below 2% by the tail end of the current fiscal year in March 2024.

With the Central Bank monetary policy meeting coming up this week, will the board be tempted to raise the benchmark rate to bring inflation back to an acceptable level? Let’s take a look at some of the factors at play.

Wage Growth Decades in the Making

The current inflation rate, which is sitting at a level not seen in the past forty years, has made it imperative for the world’s third-largest economy to rely on wage increases for continued growth, which is considered a fundamental policy objective by both the Bank of Japan and the government.

Years of sluggish growth in the world’s third-largest economy have had a negative impact on worker compensation, and since the late 1990s, salaries in Japan have remained essentially unchanged, now sitting well below the average for the OECD group of wealthy nations.

In Japan, wage growth discussions take place annually in March through the practice of “shunto”, when Japanese firms engage in wage talks with unions to determine employee pay for the upcoming fiscal year.

During the “shunto” spring wage discussions of this year, the largest average wage increase in approximately 30 years was approved. The increase was about in line with experts’ predictions for a gain of over 3%, which would have been the most since 2.9% in 1997.

The BoJ has made it clear that in order to maintain its current dovish policy, which includes the continuation of its $200 billion stimulus program designed to lessen the effects of inflation, it must continue to see wages growing at a similar pace with the consumer price index.

BoJ Monetary Policy Meeting – 16th June at 3:00 AM GMT

In April of this year, the Bank of Japan made the decision to maintain its benchmark short-term interest rate at -0.1% and the yield on its 10-year bonds at approximately 0%. This decision to keep rates unchanged was reached through a unanimous vote. However, there was a revision in the Bank’s policy rate guidance, as references to the necessity of protecting against pandemic risks and maintaining interest rates at current or lower levels were removed.

During this first meeting of newly appointed Governor Kazuo Ueda, the board also resolved to undertake a full assessment of the monetary course, with an expected time span of around one to one and a half years.

The BoJ last raised interest rates in 2007 when it moved from a 0.25% to a 0.5% short-term rate, a move that was afterward criticized for extending the end of price stagnation.

Governor Ueda, who was himself a member of the BoJ board for a number of years up to 2005, is well aware of the dangers of prematurely ending the ultra-loose policy, having taken part in Japan’s struggle against deflation. In 2000, when the BoJ decided to raise short-term rates from zero to 0.25 percent out of concern about a fragile recovery, he argued against the move.

This week, the BoJ is still anticipated to continue its ultra-loose monetary policy and its projection for a mild economic rebound, as strong business and consumer spending mitigate the effects of sluggish global demand, according to Reuters.

Their sources suggested that the central bank may imply that inflation is overshooting its expectations, which would increase the likelihood of a price projection update at its July quarterly review.

Is It Time to Sell the Nikkei 225?

To effectively trade the Nikkei 225, you first need to have an understanding of the factors that can impact its value.

These factors include the overall health and growth prospects of the Japanese economy, the monetary policy decisions made by the Bank of Japan (BoJ), the value of the Japanese yen, and the prevailing economic, political, and geopolitical conditions both locally and globally. In addition, you should take into account the performance of other global indexes and the prevailing market psychology.

You should also consider your investment horizon, as the Japanese index may yield different performances depending on whether you engage in short-term trading or invest for the long term.

After being relatively overlooked for a certain period, the Japanese stock market has regained the interest of global investors since the beginning of the year, thereby boosting the progress of the most popular Japanese index and the local currency.

Since January 2023, the Japanese stock market has displayed strong performance, surpassing several major global indices. For instance, the Nikkei 225 has just broken through the 33,000-point mark, reaching a level not seen in over 33 years. It has gained over 28% this year, making it one of the best-performing indices among developed economies’ stock markets.

But will it last?

While certain analysts argue that Japanese stocks are currently priced lower than American stocks and that the country stands to benefit from tensions between China and the United States in the tech and chip sectors, others hold the belief that the ongoing bull run is unsustainable, as there haven’t been any substantial changes in the fundamental aspects of the Japanese economy.

This is particularly true when considering Japan’s aging and declining population, which is expected to have a diminishing impact on the labor market and the country’s economic growth. This demographic shift may result in reduced consumption and increased savings, posing challenges to the sustained growth of the nation.

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