Key Points

  • Japan’s economy struggled in the first quarter and the second quarter is not shaping up to be much better.
  • Yet economists expect a sharp rebound in economic growth this year.
  • We see hefty headwinds offsetting the potential positives for Japan.

After suffering three recessions in eight years, the most recent in 2014, Japan’s economy is struggling again. This is despite having among the most aggressive monetary policies of any country in the world and largely avoiding the downside of low energy prices due to the small size of its energy sector.

Japan provides a stark contrast to what we wrote two weeks ago about the improvement in Europe's economy. The differences are clear:
First quarter GDP growth will be reported this week for Japan and is expected by the consensus of economists to be an annualized 0.2%. In Europe, it was 2.1%.

The Bank of Japan (BOJ) did not announce any new stimulus in April after the European Central Bank was aggressive with a major boost in March.

Unlike Japan, Europe's currency strength is largely a result of its growth—not an imminent threat to it.

Japan’s stock market, measured by the Nikkei 225 Index, is sharply underperforming Europe’s stocks, measured by the STOXX Europe 600 Index.

A variety of indicators suggest more weakness for the second quarter:

Business and consumer confidence measures have slumped.

The composite purchasing managers index (PMI) is signaling contraction by falling below 50.

The index of leading economic indicators fell to its lowest level since December 2012.

The earthquakes in mid-April disrupted manufacturing supply chains, making a rebound from the drop in industrial production of -1.1% in the first quarter less likely.

Surprisingly, the consensus of economists tracked by Bloomberg is for Japan’s GDP growth to steadily accelerate from 0.2% in the first quarter to 1.9% by the fourth quarter, as you can see in the chart below. The World Bank also expects a sharp rebound in growth (1.3% in 2016), as do the economists at the Bank of Japan (1.2%). To us, these expectations seem poised for disappointment.

Hefty headwinds
Japan faces significant headwinds to growth including: a rising currency, the slowdown in China, a declining workforce, and ineffective monetary policy.