Japan's Q2 GDP rebounds by 3.0%

18 September, 2018

The latest revised GDP numbers from Japan showed that the economy advanced faster than previously expected. The data on the final reading on the gross domestic product from the Cabinet Office showed that Japan's GDP advanced at an annual rate of 3.0% in the three months of April through June 2018.

The revised data reflected the quickest rise in GDP and was higher than the first quarter's GDP print of 1.9%. The second quarter GDP was the fastest increase since the economy posted a 3.4% increase in the first quarter of 2016.

On a quarterly basis, the GDP advanced 0.7% which was higher than the previous estimates of a 0.5% increase. The revisions came on an increase in growth due to domestic demand which jumped from 0.3% initially to 0.9%.

The upward revision from the previously estimated 1.9% reading confirmed that Japan's economy which is the third largest after the United States and China had rebounded from a temporary slowdown.

This came after the economy experienced two years of expansion which marked the longest patch of uninterrupted growth for nearly 28 years. The revised GDP also beat the average growth rate of 2.7% as forecast by some economists.

Japanese firms were seen stepping up the investment in factories and equipment with earnings rising to historic highs. The quarterly growth in capital expenditure was revised from 1.3% to 3.1%. The gains came from a wide range of industries that included electronics and chemical firms.

Private consumption which accounts for nearly half of the GDP was unchanged to show a 0.7% increase. Public investment, on the other hand, saw a modest revision to 0.2% from the initial reports of 0.1%. Exports remained unchanged at 0.2% increase.

When adjusted for inflation, Japan's GDP gained 2.8% on an annualized basis. This was higher than the 1.7% increase previously.

Trade disputes with the United States remains a concern

Despite the positive news, there are certain obstacles to growth. The threat of a possible trade war with the United States remains real.

The U.S. has been threatening to impose tariffs on automobile imports from Japan. The automobile sector is one of the biggest export sectors for the Japanese economy.

Imposing higher tariffs could potentially hit the export sector badly. According to a recent report by the International Monetary Fund (IMF), the automobile sector accounts for nearly 29% of Japan's GDP.

Based on the estimates, the IMF warned that higher tariffs and trade disputes could shave off nearly 0.6% from Japan's GDP.

BoJ struggles to push inflation higher

Besides the threat of trade wars, domestically, the Bank of Japan has been struggling with its monetary policy. As the central bank's balance sheet expands inflation has remained stubbornly low. In July, Japan’s annual inflation rate was at 0.9%. This was a modest increase from 0.7% previously.

The jump came in an increase in food prices. However, the annual inflation rate remains significantly lower from the BoJ’s target rate.

The markets expect that the BoJ could eventually wind up its QE program.

The Bank of Japan had at its recent meeting in July removed the timeframe for achieving the two percent inflation target. The central bank had also changed its strategy by purchasing the 10-year Japanese government bonds in order to keep yields near zero.

Economists expect that the only way for Japan’s inflation to rekindle is the upcoming sales tax plan that is due to take effect from October 2019.

The Bank of Japan will be holding its next monetary policy meeting this week. No changes are expected from the central bank. However, investors will be closely watching the BoJ’s forward guidance in anticipation of any potential clues that could signal an end to QE.

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