EIC Analysis / Interesting Topics
Japan economy: Recovering exports boost growth beyond expected level
26 July 2017

 Published in EIC Outlook Q3/2017 Click here for more detail



Japan’s economy expanded 1.0%QOQ SAAR6 in the first quarter of 2017, or 1.3% YoY. Exports led the growth trend, increasing 6.0%YOY on the back of a yen that was weaker compared to the previous year. Also supportive was demand from China and other Asian markets, consistent with higher manufacturing output. Private investment grew by 3.6%YOY. Additional contributing factors were investments in preparation for the 2020 Tokyo Olympics, reflected in the 6.1%YOY expansion in construction of residential buildings such as dormitories for athletes. However, private consumption remained sluggish, growing at 0.9%YOY, concentrated among some durable goods and services.


EIC expects Japan’s GDP to grow by 1.3% in 2017, driven by exports and government stimulus. This forecast reflects a small upward revision from 1.2% in our previous projection, since exports grew more than expected in the first quarter. This growth trajectory is expected to continue throughout 2017 in line with recovery in global demand. Exports of electronics and machinery, in particular, grew by 8%YOY and 12%YOY, respectively. The impact of public investment from the government’s economic stimulus measures will be more pronounced from the second quarter onward, from progress in several construction projects in preparation for the upcoming Olympics. A majority of the investment projects are public-private partnerships, thus inducing both public and private investment. There are also private investment in other areas such as hotels and retail stores to accommodate the rising number of foreign visitors.


The Bank of Japan will likely keep its policy interest rates on hold throughout 2017 because inflation remains low. Core inflation was just 0.2%YOY in the first quarter, reflecting anemic domestic consumption. This was partly due to sluggish wage growth. Companies are not optimistic about future revenues and are concerned that aging of the population will lead to labor shortages in the future. As a result, instead of raising wages, Japanese companies have been investing in machines and robots to support production. They have also been rewarding workers with bonus payments rather than salary increases, to maintain flexibility. These decisions put downward pressure on wages, thereby dragging on consumption. Given that inflation is still far below the target of 2% for 2017-2018, the BOJ will likely keep its short-term policy interest rate at -0.1% and long-term rate at around 0% to support the economy. Low rates will weaken the yen, which is beneficial for corporate profits, the stock market, and exporters.


Implications for Thai Economy

  • The yen appreciated 5% against the dollar from the beginning of the year through the end of May, a change comparable to that of the baht against the dollar. EIC expects the BOJ to keep its rates on hold. The Fed’s rate hike will help push the yen to 116 per dollar by the end of 2017.

  • Net Japanese FDI in Thailand grew 8.4%YOY in 1Q2017 after shrinking last year. The Thai government’s Eastern Economic Corridor plan will help attract more FDI from Japan, especially in industries with existing bases in Thailand’s Eastern region, such as the automotive and parts industry.


  • Japan’s exports of electronics, which grew at an astounding rate, benefited Thai electronic parts exporters in the same supply chains. In the first five months of this year, Thai exports of electronics to Japan expanded 39%YOY. However, sluggish Japanese demand for other products meant that overall Thai exports to Japan expanded by only 4%YOY