Japan: Growth strengthens in Q3 on exports rebound
November 14, 2016
The Japanese economy regained some momentum in Q3 despite the appreciation of the yen and expanded at the fastest pace in a year and a half. While the external sector led the expansion, domestic demand was weak, casting doubt on the sustainability of the economic recovery. GDP expanded 2.2% in Q3 over the previous quarter in seasonally-adjusted annualized terms (SAAR), which followed the 0.7% increase in Q2. Q3’s expansion exceeded the 0.8% increase that market analysts had expected. On an annual basis, the economy increased 0.9% in Q3 (Q2: +0.6% year-on-year).
Household spending was constrained by weak wage growth and bad weather. As a result, growth in private consumption decelerated from 0.5% in Q2 to 0.3% in Q3. Bolder government support prompted public spending to expand 1.7% in Q3, which contrasted Q2’s 1.3% drop. Concerns about the global outlook and the consequences of a prolonged strong yen hit business investment: gross fixed capital formation slowed from a 4.4% increase in Q2 to a 0.8% expansion in Q3. On the upside, private non-residential investment returned to growth, though its expansion was negligible at 0.1% in Q3 (Q2: -0.5% quarter-on-quarter SAAR).
Improving external demand, particularly from Asia and the United States, compensated for the strengthening of the yen, driving exports of goods and services to jump 8.1% in Q3 (Q2: -6.0% qoq SAAR). Moreover, a strong yen made purchases from overseas cheaper, translating into a 2.4% drop in imports of goods and services (Q2: -2.5% qoq SAAR). As a result of the hefty growth in exports and the drop in imports, the external sector’s annualized net contribution to overall growth rebounded from minus 0.6 percentage points in Q2 to plus 1.8 percentage points in Q3.
The strong Q3 result relieves some of the pressure on Japan’s central bank to launch a new monetary easing “bazooka” following September’s move. It also restores some confidence in Prime Minister Shinzo Abe’s pro-growth economic policies. However, uncertainties remain high in the medium term as domestic demand is still sluggish and Donald Trump’s victory is raising fears of trade protectionism.