Japan’s economy unexpectedly decelerates in Q2 as capital spending slips
Real GDP grows 1.1%; that is slower than a revised 1.9% pace in the previous quarter and falls short of forecasts for 2% expansion
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[TOKYO] Japan’s economic growth unexpectedly slowed in the three months through June, a result that may complicate the Bank of Japan’s (BOJ) policy communications as it weighs the timing of its next rate increase.
Real gross domestic product grew 1.1 per cent on an annualised basis in the second quarter as capital spending continued to slump in the face of uncertainties stemming from the Middle East conflict and private consumption flatlined under the weight of inflation, a Cabinet Office report indicated on Monday (Aug 17).
That was slower than a revised 1.9 per cent pace in the previous quarter and fell short of economists’ forecast for 2 per cent growth, while still marking a third consecutive expansion.
Capital investment fell 1.2 per cent on a non-annualised basis, a steeper decline than the revised 1 per cent drop in the previous period. It missed the estimate for 0.5 per cent growth.
“Consumption was quite weak,” said Keiji Kanda, chief economist at Daiwa Institute of Research. “The decline in nondurable goods was larger than expected, and considering that consumption was not as strong as expected and that capital spending was weak, my assessment is that the overall result was not particularly strong either.”
The figures came as Japan’s economy faces fallout from the conflict in the Middle East, which has pushed up prices for fuel and products made with petroleum while also upending some supply chains.
Private consumption came in flat, missing the consensus estimate for a 0.4 per cent advance. That result likely reflects a reluctance to spend among shoppers frustrated with rising costs of living.
The indications of weak domestic demand will be a concern for Prime Minister Sanae Takaichi, whose approval ratings have begun to dip some six months after a landslide electoral triumph as consumers dealing with persistent increases in prices see her focusing too much on other non-urgent issues.
Takaichi has deployed subsidies to put a cap on utility costs, and now plans to cut the sales tax on food to 1 per cent for two years starting in April.
Even so, the figures aren’t likely to derail the BOJ from its rate hike path.
As of Monday morning, traders were seeing a 80 per cent likelihood of the BOJ hiking its benchmark rate when it next decides policy on Sept 18, according to pricing in the overnight swaps market.
Still, if the BOJ proceeds with a hike, it may be harder for authorities to cite the economy as the driving force for that decision, as opposed to the weak yen.
Japan’s currency strengthened a tad after the data, touching 159.04 to the dollar from around 159.21 just before the release. The currency has pared gains since US and Japanese authorities intervened to support it at the end of July, and it remains considerably weaker than its 10-year average of 126.09.
The GDP figures were somewhat at odds with a string of generally upbeat corporate data releases during the period.
The BOJ Tankan survey showed business sentiment among large manufacturers advanced in June to the highest since 2018, while the gauge for large non-manufacturers hovered at the strongest level since 1991.
Industrial output rose each month from the end of the first quarter, with projections pointing to further gains in July and August, and the manufacturing PMI remains elevated after rising in April to the highest in 12 years.
The decline in business investment came even as corporate earnings have stayed relatively strong, with Japanese companies’ current profits rising more than expected from a year earlier in the three months through March.
“With regards to capital spending, our basic view is that investment remains solid, particularly in areas such as AI and data centres,” said Naoki Hattori, chief Japan economist from Mizuho Research Institute. “But some SMEs (small and medium-sized enterprises) may have held back or taken a wait-and-see approach to investment, with heightened uncertainty stemming from tensions in the Middle East possibly prompting some companies to put investment plans on hold.”
Companies face higher operating costs. Prices for corporate goods continued to rise at an elevated pace in July, advancing 7.2 per cent from a year earlier, pressuring companies to raise prices for their customers.
The government has sought to alleviate tightness in the energy market by diversifying its sources of energy as the Strait of Hormuz remains effectively closed.
June trade data showed the US accounting for almost a third of Japan’s oil imports compared with just 7 per cent in February.
Looking ahead, Japan’s economy faces a mix of supportive and adverse factors. Still, solid wage gains resulting from annual pay negotiations and government subsidies are expected to help underpin household spending, economists said. That could give the central bank confidence to move ahead with a hike next month. BLOOMBERG
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