To be clear, nobody expected Japan’s fourth quarter GDP data to be any semblance of “good”.
Back in December, the country upwardly revised a disappointing third quarter print to show the economy expanding at an annualized pace of 1.8% during the period, versus the initial 0.2% read. Analysts had been expecting a big revision (to 0.6%), but nothing of that magnitude.
And yet, as I put it at the time “nobody should get too excited”. Q4, I wrote, was “set to be some stripe of bad thanks to the tax hike and the typhoon”.
Fast forward a couple of months and the data for Q4 is, in fact, “some stripe of bad”.
Specifically, the Japanese economy contracted an annualized 6.3% QoQ, far worse than the 3.8% contraction consensus was looking for. From where I’m sitting, that looks like one of the worst prints in history – literally.
At first blush, the report looks pretty egregious. Private consumption dove 2.9% versus expectations of a 2% decline, while business spending cratered 3.7%, more than double the estimated 1.6% fall. Annualized, private consumption fell 11% and businesses pared investment by 14%.
Again, this was expected to be bad. Even if the numbers came in as expected, Q4 would still have been the worst quarter since Q2 2014, another period marked by a tax hike (you can see that clearly on the chart – it’s the 7.4% plunge).
When you toss in a typhoon and the deleterious effects of the trade war, you end up with a precarious situation. Exports have been in a slump and now, Japan is staring down the threat from the coronavirus.
Late last year, the government announced a new stimulus package aimed at averting a recession. The total size of the push is around 26 trillion yen. More than half of that (around 13.2 trillion yen) is fiscal measures. 9.4 trillion yen will be actual, fresh spending. The size looks to be just shy of 2016’s push.
This comes at a time when monetary policy is, by many accounts, exhausted and the external environment is still perilous thanks to the trade war and now the epidemic.
Shinzo Abe and Donald Trump managed to strike a somewhat sparse trade “deal” last year, but the effects of the US president’s quixotic efforts to rewrite the rules of global commerce will linger in 2020, and are set to be exacerbated by a severe drag in ex-US economies from the burgeoning pandemic.
For their part, the BoJ continues to insist that more can be done with monetary policy. And who am I to doubt them? The BoJ is, after all, the poster child for experimental easing. And yet, even if there is scope to get even weirder (if you will), it would be strange to suggest Japan has anything close to “ample” room to cut rates or expand asset purchases.
What yield curve control has shown, though, is that the “bond vigilantes” can be kept at bay indefinitely once you realize that yields are really just another policy variable for central bankers with the conviction to commandeer an entire market.
In any event, the point on Monday is simply that the fourth quarter numbers for the Japanese economy came in far worse than expected, and that’s before the impact of the virus.
You’re reminded that the Diamond Princess cruise ship quarantined in the port of Yokohama is home to the largest concentration of coronavirus cases outside of mainland China.