Japan: Economy expands robustly in Q2

The Japanese economy expanded healthily in Q2 on the back of a strong pickup in domestic demand. GDP rose 4.0% in Q2 over the previous quarter in seasonally-adjusted annualized terms (SAAR), which was notably above the 1.5% expansion in Q1. The print also far exceeded market expectations of a 2.5% increase. In annual terms GDP grew by 2.0% in Q2 (Q1:+1.5% year-on-year)

The star performer in Q2 was domestic demand, fueled by strong growth in private consumption (Q2: +3.7% quarter-on-quarter SAAR; Q1: +1.5% qoq SAAR), which expanded at the fastest pace in over three years. A strong performance in household consumption has eased some skepticism about consumers’ ability to prop up overall growth in a context of still constrained wage growth. Gross fixed investment made healthy gains following Q1’s weak print (Q2: +11.7% qoq SAAR; Q1: +3.3% qoq SAAR). Private non-residential investment also accelerated markedly in Q2. In addition, public investment expanded significantly as stimulus projects from 2016 are now underway.

The external sector was the weak spot in the second quarter. Exports swung to the downside and contracted 1.9% in seasonally-adjusted annualized terms (Q1: +8.0% qoq SAAR). Imports, on the other hand, expanded 5.6% qoq SAAR (Q1: +5.4% qoq SAAR), thus leading to a negative net contribution of 1.1 percentage points (Q1: +0.5 percentage points ). As Japan’s economy is very reliant on the external sector, a potential slowdown in global demand as well as lingering protectionist fears are vulnerabilities that could impede future growth.

The Bank of Japan (BoJ) expects the economy to expand between 1.5% and 1.8% in fiscal year 2017, which ends in March 2018. In the subsequent fiscal year, the BoJ sees GDP growth of between 1.1% and 1.5%. FocusEconomics Consensus Forecast panelists see GDP expanding 1.2% in calendar year 2017, which is up 0.1 percentage points from last month’s projection. In 2018, the panel sees the economy growing 0.9%.