Japan: Economy continues to shrink in second quarter on the back of quake effects
August 16, 2011
The Japanese economy contracted in the second quarter due to a stronger yen as well as supply chain disruptions and power outages. In the second quarter, GDP declined 1.3% over the previous quarter in seasonally-adjusted annualised terms, which was better than the 3.6% drop tallied in the first quarter (previously reported: -3.7% quarter-on-quarter saar). Although the drop represented the third consecutive negative reading, the print overshot market expectations of a 2.7% contraction, showing that the country is recovering faster than initially expected. GDP fell 0.3% quarter-on-quarter (Q1: -0.9% qoq sa), up from the 0.6% decline expected by the market. The better-than-expected print was driven by resilient domestic demand, which increased 1.7% over the previous quarter (Q1: -2.8% yoy saar). In particular, public investment contributed to growth by soaring 12.5% over the previous quarter (Q1: -4.4% yoy saar) on the back of government spending on reconstruction. Meanwhile, private consumption, which makes up about 60% of GDP, declined 0.3% (Q1: -2.5% qoq saar). On the downside, the net contribution from the external sector to GDP growth deteriorated sharply as the export-driven economy's factory output was severely damaged by the earthquake and by a stronger yen. Exports dived 18.1% over the previous quarter (Q1: +0.0% qoq saar), while imports advanced a meagre 0.2% (Q1: +6.2% qoq saar). As a result, the net contribution fell from a 0.2 percentage point decline in the first quarter to a 0.8 percentage point contraction. The sharp rise of the yen, the uncertain recovery in the United States, the debt crisis in the Euro zone and slowing growth in Asia are clouding the economic outlook. Against this backdrop, the government slashed its economic growth forecast for the current fiscal year from 1.5% to 0.5%, and for the next fiscal year from 2.7% to 2.9%.