Japan: External sector drags on economic growth in Q2
August 9, 2019
GDP expanded 1.8% in seasonally-adjusted annualized terms (SAAR) in Q2, below the 2.8% (SAAR) expansion registered in Q1 but comfortably beating market analysts’ expectations of a 0.4% increase. While the economy thus expanded for the third consecutive quarter, shrugging off fears of a sharp slowdown amid rising global trade protectionism and slowing global growth, it could pave the way for Prime Minister Shinzo Abe to push ahead with a controversial sales tax hike in October. Meanwhile, economic activity expanded 1.2% compared to the same quarter of the previous year, following the 1.0% gain recorded in Q1.
Private consumption, which expanded at the fastest pace in two years (Q2: +2.5% SAAR; Q1: +0.4% SAAR), drove the acceleration in the second quarter. This largely reflected the long spring holidays due to the changeover from the Heisei to Reiwa era and consumers frontloading spending ahead of the October sales tax hike. Government spending also expanded robustly after contracting in the previous period (Q2: +3.8% SAAR; Q1: -0.3% SAAR). Another bright note was the healthy expansion in gross fixed capital formation (Q2: +5.0% SAAR; Q1: +2.5% SAAR), which was mostly due to a surge in private non-residential investment (Q2: +6.1% SAAR; Q1: +1.7% SAAR). Capital expenditure benefited from a boost in automatization in the wake of labor shortages in the country, while the 2020 Tokyo Olympic Games supported construction activities.
On the downside, a sharp rebound in imports of goods and services (Q2: +6.7% SAAR; Q1: -16.0% SAAR) lead the external sector to detract 1.2 percentage points from total growth in Q2. Q2’s solid print for imports reflected strong domestic demand and increased consumption of durable goods. In turn, exports of goods and services contracted for the second consecutive quarter albeit at a notably slower pace (Q2: -0.2% SAAR; Q1: -7.6% SAAR), highlighting the fragility of global demand amid the trade spat between China and the United States.
Looking forward, the outlook looks less positive as summarized by Takashi Miwa, Nomura’s chief Japan economist:
“Despite what looks like strong real GDP growth on the surface, we note that real exports contracted by 0.2% q-q in Apr-Jun. […] This softness in real exports suggests that intensifying US-China trade frictions and other factors have led to an ongoing slowdown in economic growth overseas, and we think it is likely that Japan’s exports will continue to be weak for the time being. There is also a worry that the deterioration in exports will eventually take a toll on domestic capex. We think it is unlikely that growth in capex will continue at anything like the pace observed in Apr-Jun. On the whole, we think Japan will be unable to sustain the strong real GDP growth recorded in the first two quarters of 2019.”
Moreover, Q2’s strong reading supports Abe’s initiative to increase the consumption tax from 8% to 10% in October despite fears that it could hit an economy already affected by slowing global demand.
Against this backdrop, Credit Suisse’s Japan Chief Economist Hiro Shirakawa foresees that:
“The strong 2Q GDP print is likely to make the policy makers take a wait-and-see stance for the moment. We continue to think that a potential turning point for monetary and fiscal policies will be October/November when adverse impacts of the VAT hike and the recent appreciation of the yen become visible.”