Better-than-expected economic growth in Japan

Asia (including Japan)

Having contracted by 0.4% during the final quarter of 2015, Japan’s economy expanded more strongly than expected during the first the months of 2016, posting quarterly growth of 0.4% and annualised growth of 1.7%. Despite weakness in export activity and public investment, economic growth received an overall boost from an increase in government spending. The better-than-expected growth alleviated concerns that Japan might have slipped back into recession.

Towards the end of the month, investors became increasingly hopeful that Japan’s government would elect to delay a planned increase in consumption tax in order to address deflationary pressures. The rise, which was scheduled for April 2017 , would have driven up the sales tax from 8% to 10%. Investors were also cheered by better-than-expected news of industrial output , which posted month-on-month increase of 0.3% during April, despite a series of earthquakes in south-west Japan that disrupted production. Japan’s rate of inflation fell at an annualised rate of 0.3% in April. Household spending dropped by 0.4% year on year during April; nevertheless, retail sales registered a smaller-than-expected drop during the month, falling at an annualised rate of 0.8%.

The Nikkei 225 Index climbed by 3.4% during May, but registered a decline of 9.5% over the year to date. The Topix Index rose by 2.9% during May, but fell by 10.8% over the first five months of the year. Meanwhile, the TSE Second Section Index –which represents medium-sized companies – climbed by 2.3% during May, but fell by 7.1% since the beginning of 2016. During May, the price of oil reached its highest level since November 2015, which provided a boost for investor sentiment in the region.

The Reserve Bank of Australia (RBA) cuts its key interest rate for the first time in a year during May, reducing it to 1.75%. The move had been widely anticipated following the news that Australia’s annualised rate of inflation had fallen to 1.3% during the first quarter; in comparison, the RBA’s target for inflation is 2-3%. In a statement, RBA Governor Glenn Stevens said: “The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy”. The cut provided a boost for investor sentiment and the ASX All Ordinaries Index rose by 2.5% during the month, and by 1.9% over the year to date.