Japan: Economy rebounds in the second quarter
According to a preliminary reading, GDP increased 1.3% in seasonally-adjusted annualized terms (SAAR) in the second quarter, contrasting the 3.7% contraction clocked in the first quarter. While the Q2 result came in above market analysts’ expectations, it was well below that of other advanced nations—the U.S. and UK economies grew 6.5% and 20.7% respectively in SAAR terms in the same period—with the state of emergency that ran from end-April through to mid-July in Japan having weighed on activity somewhat. Meanwhile, on an annual basis, GDP expanded 7.5% in Q2, contrasting the previous period’s 1.3% contraction.
Domestically, Q2’s upturn in SAAR terms was broad-based, with private consumption, public spending and fixed investment all improving. Household spending rebounded, growing 3.4% in Q2, contrasting the 4.0% contraction in Q1 and potentially indicating consumers’ growing reluctance to adhere to voluntary stay-at-home measures. Moreover, public consumption grew 2.0% in Q2 (Q1: -6.7% SAAR), while fixed investment rebounded, rising 4.3% and contrasting the 3.5% contraction recorded in the prior quarter.
On the external front, growth in exports of goods and services picked up to 12.3% in Q2 (Q1: +9.8% SAAR). In addition, growth in imports of goods and services accelerated, rising to 21.9% in Q2 (Q1: +16.8% SAAR), which marked the highest rate in over seven years. As such, the external sector detracted 1.3 percentage points from overall growth in Q2, deteriorating from the 0.9 percentage-point subtraction in Q1.
Looking ahead, our panel sees economic growth accelerating in SAAR terms in the second half of the year, as a further rise in capital and consumer spending is bolstered by continued government spending. However, the announcement in mid-July of a fourth state of emergency—due to expire on 31 August—is likely to cap momentum somewhat.
Naohiko Baba, chief Japan economist at Goldman Sachs, sees growth strengthening towards the end of the year, commenting:
“Uncertainty is high amid the recent resurgence of Covid-19 cases in Japan. However, the effectiveness of vaccinations would appear to be gradually showing through, with the number of severe cases and deaths limited relative to the increase in new infections. As the effect of vaccinations becomes even more apparent, we forecast pent-up demand will emerge particularly in Q4. At present, we estimate real GDP growth of +4.0% in Q3 and +8.4% in Q4, with both our estimates above market forecasts.”
However, Takashi Miwa, chief Japan economist at Nomura, is less optimistic, commenting:
“While real growth surpassed the market consensus forecast in April–June, it would be premature to conclude that the entire economy has begun to accelerate. The fifth wave of Covid-19 infections from July and the fourth state of emergency declaration appear to have had less of an impact on the number of people out and about as in previous waves, but we think caution regarding severe strains on the healthcare system could lead to deterioration in household sentiment and thereby to lower consumer spending. Outbreaks overseas are also constraining production activity by Japanese companies on top of the long-running supply issues caused by the semiconductor shortage. Heading into Q3 (July–September), we expect economic momentum as shown in real GDP growth to point to ongoing stagnation.”