James Smith, Economist at ING, suggests that the Japanese economy appears to have contracted in the fourth quarter, driven mainly by a weather-induced fall in consumption. Key Quotes “Fourth quarter GDP data released at the start of next week (Sunday 2350 GMT) is likely to show that the economy ended 2015 on a sour note. Household survey data suggests that consumption, which accounts for almost 60% of GDP, contracted sharply in the final months of the year. Although consumer confidence has been relatively robust, mild weather is likely to have weighed on sales of certain goods (e.g clothing). Going forward, the outlook for consumption looks better, with lower energy prices and a slower pace of food inflation likely to provide a boost. The outlook for investment looks less encouraging. Although profits were strong in 2015 and investment intentions appear to have remained fairly robust in the fourth quarter, a decline in capital goods shipments and new orders suggest that non-residential investment will be at best flat. However, as investment is a confidence-driven activity, lingering concerns about the external environment add downside risk to both this and future GDP releases. A further drag from industry may come from inventories which, having built up in the first three quarters of 2015, are probably due a correction. On the trade side, services exports have boomed since 2012, something which is almost entirely attributable to a three-fold increase in tourist numbers (GDP data incorporates tourist consumption into the export component). This trend is so large that although services make up only 15% of total exports, they have generated around 60% of export growth since 2013. The latest tourism data suggests that this trend showed no sign of slowing in the fourth quarter and this adds some upside risk to overall GDP growth. Taking all of this into account, we have pencilled in a quarterly (annualised) contraction of 1.2%, led predominantly by a fall in consumption. That said, the GDP number is notoriously hard to forecast (the Bloomberg consensus spreads from 1.6% to -3%) and there are risks in both directions (although they are arguably skewed slightly further to the downside). If growth disappoints, this will place further pressure on the Bank of Japan to act again. With the Yen appreciating more and more by the day and the prospect of further ECB easing at its next meeting, we think there is an increasingly strong chance that the BoJ will cut rates further at its meeting on March 15th.” For more information, read our latest forex news.