Bullish on Japanese Growth

by: SA Editors

Morgan Stanley economist Takehiro Sato is optimistic on the Japanese economy:

The Japanese economy looks to be in excellent condition. In revising our data forecasts based on monthly indicators, we found that 4Q real GDP appeared to rise 7.6% SAAR, by far the fastest rate of growth among advanced economies. Our estimate is at the top end of market forecasts, but the consensus is for nearly 5% growth. So, this is merely a question of degree; there is little disagreement that the Japanese economy gave an excellent performance.

Meanwhile, the core CPI inflation rate was finally positive for two consecutive months, but excluding the impact of broadly-defined public charges, the baseline nationwide CPI inflation rate shows, if rounded, year over year change of 0% for seven straight months.

The Japanese economy has already seen growth rates of around 2-3% continue for three years since 2003, and not only did it have average annualized growth of 3.9% from 1Q to 3Q in 2005, rapid growth on par with the US, but to date prices have not shown a major response. We believe that this decoupling between the economy and price performance means that the output gap has not contracted much because of an upward shift in growth potential.

If this hypothesis is correct, it means it is possible to enjoy the fruits of continued ideal economic growth under conditions of disinflation. The implication for asset markets of continued high growth and low inflation is a continued goldilocks state of buoyant equity and stable bond markets.

See Takehiro Sato's full analysis.

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