Japan GDP

Economic growth unexpectedly slows in Q2

GDP underperforms: Japan's GDP increased 1.1% on a seasonally adjusted quarter-on-quarter annualized (SAAR) basis in Q2, following 1.9% growth in the prior quarter and underperforming the euro area, the UK and the U.S. The market had expected GDP growth to slightly accelerate. On a year-on-year basis, economic output expanded 0.7% in Q2, following 0.5% growth in the prior quarter.

A broad-based slowdown: Compared with the prior quarter's data, readings in Q2 worsened for private consumption (-0.1% on a seasonally adjusted quarter-on-quarter annualized (SAAR) basis vs +1.9% in Q1), fixed investment (-3.4% vs -1.1% in Q1), exports of goods and services (+2.1% vs +7.1% in Q1) and imports of goods and services (-6.0% vs +1.1% in Q1). In contrast, the reading for government consumption improved in Q2 (+6.7% vs +1.5% in Q1). Consumer spending fell as inflation picked up and a typhoon in June forced businesses to close, while fixed investment fell for a second consecutive quarter for the first time in 10 years, possibly due to the economic uncertainty generated by the Iran crisis. The conflict also pushed down exports, with the closure of key flight hubs contributing to another sharp drop in tourist arrivals and trade disruptions in the Strait of Hormuz choking off outbound goods shipments. Finally, public inventories shaved 2.1 percentage points off of GDP growth as the government released crude oil inventories, again as a result of the war. More positively, government spending soared as the Takaichi administration presses ahead with fiscal stimulus—though even this poses economic risks, with the bond yields of Japan—whose public debt is over 200% of GDP—recently reaching a 30-year high.

Panelist insight: Analysts at Nomura are optimistic on Japan’s outlook: “We expect the Japanese economy to continue to recover in line with or above its potential growth rate despite the two shocks of tensions in the Middle East and the Kumamoto earthquake. We still think that capex will act as the basis for economic recovery.” On the implications for monetary policy, HSBC economists commented: “For monetary policy, today's print was weaker than markets expected, but it still points to an economy expanding at a modest pace. Recent BoJ messaging has also skewed more hawkish, with some board members flagging scope to raise rates faster than the current pace of roughly twice a year amid concerns that underlying inflation could overshoot on renewed yen weakness. With July CPI likely to firm, policy normalisation still looks on track, with a rate hike likely in the coming months.”

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