Japan's second quarter GDP rebounds

15 August, 2018

Japan's economy was seen rising more than expected in the three months ending June 2018. Growth was helped by strong household consumption and business spending which recovered from a contraction just in the previous quarter. However, global trade tensions continue to post a major headwind to the export and investment outlook.

Japan's GDP expanded at a pace of 0.5% in the second quarter. This came following a revised contraction of 0.2% in the first quarter which put an end to the best longest run of economic expansion since the 1980's in Japan.

On an annualized basis, Japan's GDP advanced 1.9% on the year during the period. This beat market estimates of a 1.4% increase.

Japan Q2 Preliminary GDP: 0.5% (Source: Tradingeconomics.com)

The markets were expecting to see a quarterly GDP expansion of 0.3%.

Consumer spending saw a strong rebound which was a welcome development by the Bank of Japan. However, the data is unlikely to compel policy-makers from changing its position on interest rates which are required to remain at historically low levels for a very long time.

Although the second quarter GDP data was better than expected, some economists believe that the global trade disputes will hurt the export and the manufacturing sector. These two sectors remain the major drivers of growth in Japan which is the third largest economy, globally.

Japan's finance minister, Taro Aso said that "things are going well, but given questions around trade friction between the United States and China, there is a lot of uncertainty whether things will continue to go well."

The second quarter GDP data showed that Japan's economy was broadening with domestic demand being the major drivers of growth.

Private consumption which accounts for over 60% of the growth of the economy increased by 0.7%. This came from increased demand in the automobile sector and home appliances.

Private consumption increased more than the median forecasts of 0.2% and follows a revised 0.2% decline in the first quarter.

The upbeat headline print also came with a cautious undertone with growth in the third and fourth quarter expected to rise at a slower pace. The weakness is expected amid lower wage growth and capacity constraints.

Japanese firms continue to face labor shortages. This comes due to a rapidly aging population. Some firms in Japan were also seen shortening work hours due to lack of labor skills.

Consumption is also expected to play an important role in driving inflation higher. However, consumer price index has been rising at a sluggish pace. The Bank of Japan had pushed back its expectations on unwinding its bond purchases at least until 2020.

Capital expenditure also increased during the quarter, rising 1.3%. This outcome beat market expectations of a 0.6% increase which marked the biggest gain since the third quarter of 2016.

The official data showed that the external factors were unfavorable. This comes despite the limited impact on exports due to rising trade tensions during the second quarter.

The external demand which measures exports to the imports fell 0.1%. This missed estimates of a 0.1% increase.

Economists note that the heightened trade tensions could continue to cause uncertainty. Firms are expected to rein in spending as a result, which could hit both wages and consumption indirectly.

Japan was also not spared by the Trump administration who is currently pushing for Tokyo to agree to a free bilateral trade agreement. President Trump threatened Tokyo with higher tariffs if it refused the offer.

No headway was made between the two nations as late as last week. The U.S. and Japan trade representatives failed to make any progress as Japan's economy minister Toshimitsu Motegi stuck to Tokyo's position of its preference for multilateral free trade agreements.

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