Last week Yuriko Koike, the leader of Japan’s ‘Party of Hope’ and the main opposition to Japanese Prime Minister Shinzo Abe, unveiled her “12 zeroes” manifesto. The promise of ‘zero’ hay fever caught my attention: a welcome claim for the 25 million sufferers in Japan, but astonishing that politicians can claim to defy Mother Nature! If we made such a pledge in our marketing materials I suspect the regulator would have something to say about it…
What has also caught my attention of late is the impressive level of activity in Japan. Second-quarter real GDP was 2.5%, which is meaningfully above the assumed potential of 0.5 to 0.75%. Even more encouraging was the composition of growth, with private consumption and investment activity strong. The Tankan survey – a quarterly survey of business confidence – points towards a continuation of this trend into the second half of the year, as shown in Chart 1.
This pick-up in business activity is not unique to Japan. The rotation towards investment has been highlighted by central banks, in particular by the Bank of England in its August inflation report and its governor Mark Carney, who recently pointed out the increase in capital goods orders in advanced economies (Chart 2). I believe that this development is one of the most encouraging macroeconomic events that we have seen in a while.
Source: Macrobond. Capital goods are tangible assets such as buildings, machinery, equipment, vehicles and tools that a company uses to produce goods or services.
Global corporate profitability and elevated business confidence point to a changing dynamic in business investment, but only time will tell if this is the beginning of a trend. If so, we should expect higher productivity, healthier potential growth and less depressed neutral terminal rates – all of which will have an impact on monetary policy.