Japan Economy: Lower Than Expected Q2 Growth
British Embassy Tokyo
Q2 GDP grows at an estimated 2.6% annualised rate. This is the third consecutive quarterly gain but less than the market expected. PM Abe is expected to decide on the scheduled consumption tax increase in September following a revised estimate. Many judge that growth remains firm enough for the tax increase to go ahead.
Japan’s economy grew 2.6% in terms of annualised quarterly growth (0.6% compared to the previous quarter). This was the third consecutive quarterly economic expansion but less than the market consensus expectation of 3.6% (0.9% qoq). Q2 growth was mainly driven by private consumption (0.8% compared to the previous quarter), exports (3.0%), and public demand (1.0%). However, private capital investment remained weak at -0.1% and private inventories contributed -0.3% point to the quarterly growth. The Q2 GDP deflator, an aggregate price indicator, fell 0.3% compared to a year ago. This was its 15th consecutive fall, albeit less than previously. On a quarter-over-quarter basis, the GDP deflator actually increased (by 0.1%) for the first time in three quarters.
Analysts have noted that this first estimate of Q2 GDP statistics will feed into PM Abe’s decision on the consumption tax increase currently scheduled for April 2014. There have been some calls for this to be delayed due to the risk of choking off Japan’s nascent economic recovery. The second estimate will be released on 9 September after further details on private capital investment and private inventories are made public in the Q2 Corporate Survey released on 3 September. Second estimates are seen as more reliable, and private capital investment figures are often significantly revised.
At the same time, Q1 GDP growth was slightly revised down to 3.8% from 4.1% in terms of annualised quarterly change.
Many commentators see underlying economic activities as firm. It was volatile private inventories that mainly pushed down the Q2 GDP growth rate - without this contribution, the growth rate was more or less in line with the market consensus estimate. They therefore believe that this result should not divert the government from its plans on the consumption tax increase. Economic Minister Amari said after the GDP release that the report was another good number for the upcoming consumption tax increase decision. Nonetheless, the data will have given further potential ammunition to the sceptics.
Despite the latest figures, we assess that current domestic economic activities should be strong enough to withstand any shock from consumption tax increases. The scheduled increases are a vital first step toward fiscal consolidation. If the government fails to stick to the current plan, market confidence in such consolidation could be hit – affecting not only domestic but also global financial markets. So the government would need to reflect very carefully before shifting course
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