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Economy in Brief

Japan's GDP Accelerates
by Robert Brusca  August 15, 2022

Real GDP in Japan rose by 2.2% at an annual rate in the second quarter of 2022. This is a marked acceleration from the 0.1% rise in the first quarter of 2022 but slower than the 4% recovery pace in the fourth quarter of 2021 after GDP declined in the third quarter of 2021.

Quarter-to-quarter trends in real GDP components
Private sector consumption was up at a sharp 4.6% in Q2 2022 while public consumption accelerated to a 2.2% annualized rate from 1.7% the quarter before.

Gross fixed investment posted positive growth gaining at a 3.4% annualized rate in Q2, the first quarterly increase since the second quarter of 2021.

Housing extends a string of quarterly declines as residential investment posted a -7.2% annual rate in Q2, an accelerated pace from a -5.6% rate in Q1 and -5.2% in Q4 2021.

Exports continue to show increases, rising at a 3.7% rate in the second quarter, up at about the same pace (3.6%) in the first quarter. Imports slowed with 2.7% pace after a 14.8% pace in the first quarter.

Year-over-year trends in real GDP
Year-over-year trends show slight change in the pace of GDP as it grew by 1% over four quarters compared to 0.9% on that same basis in the first quarter. Private consumption has accelerated steadily from a year-over-year rate of 0.4% in the third quarter of 2021 to 1.3% pace in the fourth quarter of 2021 to 2.2% pace in the first quarter of this year and 3% over four quarters in the second quarter. By comparison, public consumption continues to be expansionary but growing only by 1.7% year-over-year and without any clear trend.

Gross capital formation continues to be under pressure showing a 3.5% drop over four quarters in Q2 2022 compared with a 3.9% drop logged in Q1. Capital spending shows declines over four quarters for each of the last four quarters with the last gain being a 1% rise in the second quarter of 2021. Spending on plant & equipment dropped in Q2 logging a 0.8% decline over four quarters; its last increase was a gain of 1.1% over 4 quarters in Q3 2021.

Domestic demand in Japan has grown by 1.2% over four quarters in Q2 2022 and had advanced by 1.4% over four quarters in the first quarter of the year. Both of those represent steps up from the previous two quarters; i.e., Q3 2021 and Q4 2021.

Japan indicators in 2022
Japan's economy continues to struggle. In June, retail sales fell by 1.1% month-to-month while rising by only 1.5% over 12 months. Employment in Japan rose by 0.2% in June and had gained only 0.3% over 12 months. Japan's leading economic index in June fell for the second month in a row; that indicator is down by 1.4% over 12 months. The year-over-year drop in the LEI sits in the 43rd percentile of its historic queue of data; evaluated on its level, instead of its growth rate, it has a 68-percentile standing. That's better but still not very good. However, one of the brighter notes on Japan's economy is its economy watchers index with the current index in June at a 91-percentile standing and looking solid.

The yen
The yen and has been weakening, improving Japan competitiveness in international trade while raising costs to consumers for imported goods- especially energy. Yet, Japan's exports still appear to be engulfed in a protracted slowdown: they have slowed down from a 27.2% pace over four quarters in the second quarter of 2021, to 15.7% pace in the third quarter of that year, and to a 6% pace in the fourth quarter of that year. In the first quarter of 2022 exports grew by 4.6% over four quarters while in the second quarter they were up by only 2.5% over four quarters. Exports have not responded to the weakness in the yen at least not on a year-over-year basis.

Year-over-year trend in imports show some general slowing from an 11.4% gain over four quarters in the third quarter of 2021 to 5.6% gain in the fourth quarter that improved with 7.3% gain in the first quarter of 2022, but they have slipped back to 3.5% gain in the second quarter of 2022.

It's hard in these data to find any clear exchange rate effects and that's partly because of the erratic growth in Japan's trade partners. Japan trades the most with China and next most with the United States. The U.S. economy right now is slowing down and it has logged negative growth rates in the first two quarters of 2022. China is currently showing economic results that are much weaker than expected even though weakness has been expected because of China's zero COVID policy. COVID now seems to be far more prevalent throughout the country than it was when China began this policy. These rolling lockdowns meant to contain COVID are having a substantial effect depressing Chinese growth. There are also problems in the Chinese property market after government policy to forcibly restrict that sector have spread.

The global economy is slowing as central banks fight inflation. Japan has less of a problem in that regard than other G-7 countries. Right now, Japan is most adversely affected by China; that economy is really wrestling with its zero COVID policy. However, the U.S. has slowed down considerably, and both the Federal Reserve in the U.S. and the ECB in Europe, as well as the BOE, are raising rates and trying to gain control of what has been runaway inflation. In the meantime, there are still global supply issues and distortions created by and perpetuated by the ongoing war between Russia and Ukraine. The situation remains difficult, however, the weakness in the yen may yet breathe some life into Japan's economy especially if weaker global growth allows energy prices to drop.

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