Japan: surprisingly high economic growth in spring

Japan’s latest macroeconomic growth figures are unexpectedly positive: In the second quarter, the economy grew by 0.4% compared with the previous quarter, which in turn has been revised upwards again from 0.5% to 0.7% (Q/Q). This came as a surprise after most sentiment indicators such as the consumer climate and the sentiment among companies measured in the central bank’s Tankan Index had recently been on a continued downward trend.

Nonetheless, consumption increased by as much as 0.6% (Q/Q) in the second quarter, and investment activity was not so bad either: gross fixed capital formation grew by 1.2% (Q/Q). After all, the state also increased its consumer and investment spending somewhat in the past quarter, thus contributing to the surprisingly high overall growth before the middle of the year. However, foreign trade cost some growth overall. Exports fell slightly in terms of volume; however, the fact that there was „only“ a minus of 0.1% overall is quite surprising in view of the temporary double-digit slump in exports to China in the spring. The fact that imports, on the other hand, increased by 1.6% this time was expected and can be seen as a counter-reaction to their sharp decline from the previous quarter.

Many pessimists have not yet confirmed the latest figures with a view to this year’s economic development in Japan. On the contrary, it is remarkable that the first quarter in particular has now been revised up for the second time in a row and that consumption and investment have increased significantly towards the middle of the year. However, this must also be seen in the context of the planned VAT hike on October 1, which is unlikely to be cancelled now. The advance purchases to avoid the higher tax apparently began in full as early as spring.

We now expect similarly positive economic growth in Japan in the third quarter, although this is likely to show signs of a slowdown in exports due to the ongoing uncertainty surrounding trade with China and the new trade disputes with South Korea. In the final quarter of the year, consumption will then collapse as a result of the value-added tax step and the quarterly growth rate of the economy as a whole will fall sharply. However, due to the large number of expansionary countermeasures by the government (including higher social spending and some tax refunds for cashless purchases), the VAT increase is unlikely to drag the economy as a whole into a longer recessionary phase.

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