Japan: Sluggish economy in the second quarter

The Japanese economy did little more than stagnate in the second quarter, growing only 0.2 per cent (q-o-q, annualized). This setback does not come as a complete surprise given the surprisingly strong figure in the first quarter, when GDP grew 2.0 per cent (also q-o-q, annualized). Nevertheless, the latest figure fell short of the market’s expectations. All the same, compared to the year-earlier period Japan’s economy climbed back into the black again, with a growth rate of +0.4 per cent (y-o-y) after two quarters in the red.

Major reasons contributing to the weak performance in the spring quarter include external influences such as production shutdowns in April in the wake of the earthquake on south island Kyushu, where many companies have automobile and IT production plants, which are export-intensive industries. Exports then also fell steeply in the second quarter (-1.5% q-o-q, simple rate). But inventory depletion (-0.2 % q-o-q) also had a negative impact on growth. Imports also declined (-0.1 % q-o-q), but no longer at the same high rate as in the previous quarter. While companies’ capital expenditure on plant and equipment was down on the previous quarter (-0.4 %), investments in residential building shot up +4.8 per cent (q-o-q) because of one-off effects and the central bank’s zero rate policy. Private consumption also made a positive contribution to growth, albeit only a very limited one (+0.2 % q-o-q). The same applies to public sector expenditure, which also increased by only 0.2 per cent (q-o-q). Taken together the positive demand components were enough to offset the negative effect from foreign trade, capital expenditure and the inventories component, but only just.

Growth should pick up somewhat in the third quarter because catch-up effects are likely after the production stoppages in the previous quarter. But the positive dynamic is nevertheless curbed by the appreciation effect of the yen, which initially belongs to the “safe” currencies at risk of further appreciation since the Brexit decision in the UK. Nor is the momentum of consumer spending likely to stage a broad-based recovery especially as consumer confidence has ebbed again somewhat since mid-year in the wake of disappointing wage growth figures. In the latest sentiment surveys the companies also continued to express rather skeptical expectations. Positive growth effects from the fiscal package recently announced by the government can only be expected towards the end of the year. At least in the winter half year 2016/17 growth will then be “push-started” somewhat by additional government spending. In the longer term the package improves Japan’s growth outlook, but very little. The typical “stop-and-go” pattern is more likely: a short-lived positive stimulus from the state is soon followed by a cyclical counter-reaction.

After the GDP figures for the second quarter we are leaving our growth forecast for Japanese gross domestic product unchanged at +0.5 per cent for this year and at +0.6 per cent for next year.

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