Japan Q2 GDP Rebounds on Resumed Auto Output, Wage Hikes; Heat Wave Also Boosts Consumer Demand for Air Conditioners, Summer Goods

–Q2 GDP +0.8% Q/Q, +3.1% Annualized, Above Median Forecasts of +0.6%, +2.3%
–Domestic Demand Pushes Up GDP by 0.9 Point, Net Exports Trim Growth by 0.1 Point

By Max Sato

(MaceNews) – Japan’s gross domestic product for the April-June quarter posted a stronger-than-expected rebound after suffering its first contraction in two quarters in January-March, up a preliminary 0.8% on quarter, or an annualized 3.1%, as consumption and business investment picked up after having been hit by suspended output at Toyota group factories over a safety test scandal, Cabinet Office data released Thursdayshowed. Public works spending also marked a sharp rebound.

Thanks to robust private consumption, growth came in above the median forecast of a 0.6% rise on quarter and at the top end of the economist forecasts that ranged from 0.2% to 0.8%, beating a consensus 2.3% rise at an annualized pace and the forecast range of 0.6% to 3.0%.

The rebound in the second quarter GDP recovered all of an upwardly revised 0.6% drop, or an annualized 2.3% in the first quarter. The economy narrowly averted a second straight contraction in the final quarter of 2023, when it showed an upwardly revised 0.1% growth on quarter, or an annualized 0.3% increase.

Domestic demand added 0.9 percentage point to total domestic output, above the median forecast of plus 0.6 point, after pulling down the first quarter GDP by 0.1 point (revised up from minus 0.4 point). External demand (exports minus imports) is still sluggish, trimming overall growth by 0.1 point, in line with consensus after making a negative 0.5-point contribution in the prior quarter (revised down from minus 0.4 point).

Looking ahead, the economy in July-Septmeber is expected to show moderate growth as large firms are raising wages at the fastest pace in 33 years and investing in capacity to cope with labor shortages. Real wages rose 1.1% on the year in June, marking the first rise in 27 months, after falling 1.3% the previous month.

From a year earlier, the economy fell 0.8% (consensus was a 1.2% drop) in April-June for the second consecutive drop after slipping 0.9% in January-March (revised from a 0.8% fall).

The Econoday Consensus Divergence Index stands at plus 21, comfortably above zero, which indicates the Japanese economy is performing better than expected after outperforming with a slight margin. Excluding the impact of inflation, the index is at plus 40.

The Cabinet Office estimates that in order for real GDP to hit the official forecast of 0.9% growth in fiscal 2024 (revised down from 1.3% last month), the economy will have to grow 0.51% on quarter, or an annualized 2.1% in each quarter of the three quarters left in the fiscal year ending next March, which might be challenging for Japan’s wobbly recovery from the pandemic.

The economy grew a real 0.8% (revised down from 1.2%) in fiscal 2023, which is now clearly below the official forecast of a 1.6% rise, after expanding 1.6% in fiscal 2022, which was slightly under the official projection of 1.7%. It followed a 3.1% gain in fiscal 2021 and decreases of 3.9% in fiscal 2020 and 0.8% in fiscal 2019.

Consumption Rebounds More Sharply Than Expected

Private consumption, which accounts for about 55% of GDP, rose 1.0% for the first increase in five quarters, coming in much stronger than the median projection of a 0.5% rise (forecasts ranged from 0.3% to 0.5% gains). It followed a 0.6% drop in the first quarter. Toward the end of the second quarter, the killer heat wave boosted demand for air conditioners and refrigerators while a late start to the rainy season in many regions propped up demand for beverages, snacks, eating out and summer clothing.

Consumption pushed up the second quarter GDP by 0.5 percentage point after making a negative 0.3-point contribution (revised from minus 0.4 point) to the total domestic output in the previous quarter.

Capex Also Makes Up for Q1 Slip

Business investment in equipment rebounded 0.9% on quarter in April-June, slightly above the median forecast of a 0.8% rise (forecasts ranged from a 0.1% drop to a 1.6% rise). It recovered from a 0.4% fall in January-March but was slower than the 2.1% rise in October-December.

Capex made a positive 0.2-point contribution to the second quarter GDP after providing a negative 0.1-point contribution the previous quarter.

Some firms are cautious about implementing their solid plans amid elevated costs and uncertainty over global growth but capital investment is generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.

Net Exports Sluggish

Net exports of goods and services — exports minus imports — made a negative 0.1 percentage point contribution to the total domestic output, in line with the median forecast of a 0.1-point decrease (forecasts ranged from minus 0.4 to plus 0.2 points) after trimming the GDP by 0.4 point in the previous quarter.

Japanese exports of goods and services rose 1.4% on quarter in the April-June quarter GDP after posting their first quarterly decline in four quarters in January-March with a 4.6% dip. Imports also rose 1.7% after falling 2.5% in the previous quarter, which was the first decline in three quarters.

The number of visitors from other countries has recovered to pre-Covid levels and their spending is counted as Japanese exports of services. By contrast, the volumes of goods exports are falling as the effects of the past rate hikes by major central banks are weighing on global growth.

Private Inventories Trim GDP, Public Works Spending Rebounds Sharply

Private sector inventories provided a negative 0.1 percentage point contribution to the second quarter GDP, compared to the median forecast of minus 0.1 point (forecasts ranged from minus 0.2 point to zero), after pushing up the first quarter GDP by 0.3 point.

Public works spending posted a sharp 4.5% surge (consensus was a 4.1% jump), backed by the stimulative effects of the fiscal 2024 budget, after slumping 1.1% in January-March. Forecasts ranged from 1.2% to 7.8% gains. Public investment made a positive 0.2-point contribution to the second quarter GDP after lowering the total output by a slightly negative 0.1 point in the previous quarter.

Price Pressures Continue Easing Both on Year, Pick Up on Quarter

The unadjusted deflator rose 3.0% on year in April-June after rising 3.6% in January-March and 3.9% in October-December. The slower increase was due to a 6.9% rise in the import deflator following a 2.9% gain in the previous quarter. The pace of increase in the domestic demand deflator accelerated slightly to 2.4% from 2.3%.

The seasonally adjusted deflator rose 1.0% on quarter after rising 0.3% in the first quarter, with the domestic demand deflator also increasing 1.0% after rising 0.5%. The import deflator rose 1.9% after rising 1.5% in the prior quarter.