With all the industry activity rising in October and the past week’s all-industry and trade reports pointing to encouraging trends, Q4 is set to clock yet another quarter of positive GDP growth, opines Daiwa Capital Markets. Emily Nicol and Chris Scicluna point out in their December 21 research piece titled “Yen 4Sight” that with the Bank of Japan’s yield curve control framework having been in place, the BoJ’s recent Policy Board meeting retained the policy rate at -0.1% while maintaining the 10-year yield target at around 0%.

Japan’s all-industry output at 2-and-a-half-year high

Nicol and Scicluna highlight that the central bank will maintain the current rate of JGB purchases, with plans to enhance its holdings at an annual pace of JPY80 trillion. The Daiwa analysts believe that the BoJ will continue to expand the monetary base at least until core inflation has surpassed 2%. Among the various announcements at the BoJ’s recent meeting, the analysts singled out the “more positive tone” sounded by the BoJ while assessing economic conditions. The Daiwa analysts point out that the BoJ provided a more sanguine view of improvements in exports, industrial production, private consumption and capex. However, the analysts anticipate that core CPI (excluding fresh foods) will record higher levels over the coming months, largely due to higher energy prices and a weaker yen. They anticipate that inflation will remain somewhat below the BoJ’s target for the near future:

Nicol and Scicluna argue that the BoJ’s continued optimism on the economic outlook has been reinforced by the economy expanding in Q3 with stronger-than-previous estimates.

Japan’s trade surplus at near six-year high

On the topic of trade surplus, the Daiwa analysts point out that though at face value, one would see Japan’s November goods trade report as disappointing, when adjusted for seasonal factors, the trade surplus was rising to a near six-year high of JPY536 billion, aided by over 5% depreciation, which boosted dollar-denominated exports in yen terms. Nicol and Scicluna highlight that Japan’s exports rose for the fourth consecutive month, with over a 4% M/M increase, which is the strongest growth since early 2014.

The Daiwa analysts also point out that the value of exports of machinery and chemicals posted the first positive annual increases since 2015. Thanks to imports dropping 0.5%, the analysts reckon that  Japan’s net trade in November will have provided support for GDP growth in Q4 for the fourth quarter out of the past five. The analysts believe that on the back of private domestic demand maintaining a moderate recovery, Japan’s GDP growth will surpass 1% in the current fiscal year and maintain the trend next year as well.