Japanese growth rebounds in Q2 amid buoyant domestic demand
The estimate for Japanese second quarter real GDP growth came in at 0.5% quarter-on-quarter (q/q), rebounding from a 0.2% q/q contraction in Q1. This not only confirmed the temporary slowdown in the Japanese economy in the first quarter but beat market expectations of 0.3% q/q and marks a return of Japanese growth to above potential growth.
Growth was driven by domestic demand, which is encouraging given the weaker outlook for global trade in the second half of the year.
Strong domestic demand
Growth in the second quarter was driven by strong domestic demand, which contributed 0.6 percentage points (pp) to growth.
Domestic demand was driven by consumption and investment. Consumption rose by 0.7% q/q, contributing 0.4 pp to growth alone. This marked an expected rebound from the contraction in consumption in the first quarter, which was due to a temporary spike in inflation.
Investment also helped drive growth, contributing 0.1 pp. Private non-residential investment (capital expenditure or capex) was particularly strong, rising by 1.3% q/q and contributing 0.2 pp to growth. This was consistent with strong capex intentions from the Tankan survey in Q2 and offset contractions in residential and public investment.
Drag from net exports
Net exports were a drag to real GDP growth of 0.1 pp. The contribution from exports to growth has now slowed for three consecutive quarters and in Q2 exports made no contribution to growth. Meanwhile stronger imports, consistent with stronger domestic demand, meant net exports were an overall drag to growth.
Strong print unlikely to change course of monetary policy
The GDP deflator, a measure of inflation, decelerated to 0.1% year-on-year (y/y) in Q2 from 0.5% y/y, mirroring weak inflation developments in Q2. Ultimately it is the weakness in inflation that is the main problem for the Bank of Japan (BoJ) and this positive surprise to Japanese growth should leave the course of the BoJ unchanged. Strengthened forward guidance in the last policy meeting, suggests the BoJ will continue with powerful monetary easing, but steps to allow the 10-year Japanese government bond yield to rise an additional 10 basis points suggests a strong reluctance to ease further.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.