Japan: Weak Q2 GDP fuels policy debate
August 15, 2016
The Japanese economy managed to expand for the second consecutive quarter in Q2 but at a disappointing rate. Economic dynamics were negatively affected by a number of factors including weaker wage growth and a rising yen. GDP expanded 0.2% in Q2 over the previous quarter in seasonally-adjusted annualized terms (SAAR), which followed the revised 2.0% increase tallied in Q1 (previously reported: +1.9% quarter-on-quarter SAAR). Q2’s print was below the 0.7% increase that market analysts had expected. On an annual basis, economic activity increased 0.6% in Q2 (Q1: +0.2% year-on-year).
Weaker gains in wage growth led private consumption to decelerate from a 2.8% expansion in Q1 to a 0.6% increase in Q2. As the positive impact from the previous fiscal stimulus started to fade, growth in government spending slowed to 0.9% (Q1: +3.7% qoq SAAR). On the upside, investment rebounded and expanded at the fastest pace since Q1 2015 (Q1: -1.8% qoq SAAR; Q2: +3.7% qoq SAAR), while the decline in private non-residential investment eased to 1.5% (Q1: -2.7% qoq SAAR).
On the external side, exports declined a sharp 5.9% due to the strengthening of the yen (Q1: +0.4% qoq SAAR). Imports dropped a softer 0.3% in Q2 compared to Q1’s 2.1% decline. As a result, the external sector’s annualized net contribution to overall growth tumbled from plus 0.5 percentage points in Q1 to minus 1.0 percentage points in Q2.
In an attempt to jumpstart growth, Prime Minister Shinzo Abe's cabinet approved JPY 28.0 trillion (USD 265 billion) in stimulus measures on 2 August—only JPY 7.5 trillion will be new spending—, while the Bank of Japan timidly expanded its monetary easing program in July. Nevertheless, Japan’s challenging economic outlook is adding pressure on the authorities to take further action in order to shore up the economy.