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Economy in Brief

Japan's GDP Is Revised Up from 2.2% Q/Q to 3.5%
by Robert Brusca  September 8, 2022

Japan's second quarter GDP was revised up to show growth of 3.5% at an annual rate compared to the previous estimate of 2.2% - an upward revision greater than what had been expected. Japan's year-over-year GDP growth in the second quarter is now up to 1.4% from 1% previously. The 1.4% growth rate is the strongest since the second quarter of 2021 when GDP rose at a 7.3% year-on-year rate after declining in the first quarter under the pressure of COVID policies.

Japan's quarterly growth
Private consumption growth in the quarter was revised up to a 4.8% growth rate from 4.6% previously. Public consumption in the second quarter grew at a 2.8% rate annualized compared to 2.2% previously. Private sector consumption continues to be the principal driver of GDP growth.

Gross fixed capital formation in the quarter grew by 4.9% at an annual rate compared to 3.4% previously. Plant & equipment spending rose to an 8.3% annual rate, up from 5.8% previously as investment demand heated up in the quarter. However, the housing estimate was little changed in the second quarter with revised housing investment falling at a 7.3% annual rate compared with decline at a 7.2% annual rate previously. Housing continues to lag and to contract.

Export growth was unrevised, rising at an annualized 3.7% pace quarter-to-quarter while imports were weaker, rising by 2.2% compared to 2.7% previously. Weaker import growth adds slightly to GDP growth.

Japan's domestic demand was stronger at a 3.2% annual rate in the second quarter compared with its 2% pace previously.

Annual rates of growth
Upon revision Japan's economy is looking firmer and stronger than it was previously. Still, year-on-year growth is up at a modest 1.4% for GDP while domestic demand is up at a 1.6% growth rate over four quarters. Consumption continues to drive GDP; the year-on-year increase in private consumption is up by 3% compared to 1.9% for public consumption. Year-on-year gross fixed capital formation is falling at a 3% annual rate over four quarters marking the fourth straight quarter in which gross fixed capital formation logs a year-on-year decline. Plant & equipment spending is flat year-over-year in the second quarter, and that's an improvement from its previous pace of -0.8%. Year-on-year housing investment is down by 6.3%, marking the third quarter in which the year-over-year growth rate is negative for housing investment. The year-on-year trend for exports continues to diminish; exports grow at a 2.5% pace over four quarters; that's the fourth quarterly deceleration in a row for the year-over-year growth rate for exports. Imports are up by 3.3% over four quarters. Imports grew at a 7.3% pace in the first quarter; second quarter growth is the weakest annual import growth since the first quarter of 2021. Japan's domestic demand which rose 1.6% over four quarters is slightly stronger than the 1.4% gain it made on that same basis in the first quarter and stronger than the roughly half a percentage point gains logged in the fourth quarter of 2021 and in the third quarter of 2021. But domestic demand is only firmer and doesn't show any clear signs of acceleration.

BOJ policy
The Bank of Japan is still trying to nurture growth. Meanwhile, other G-7 central banks are raising rates and fighting substantially elevated inflation rates. The Bank of Japan continues to hold its monetary policy steady. This has led to an extended decline in the value of the Japanese yen as foreign interest rates have been rising - sometimes sharply. So far, there is not much evidence that this decline has either spurred exports, slowed imports or a stoked domestic inflation. The move in the end which is aggressively lower is still relatively recent, and it does take time for exchange rate effects to work their way through the system. We should look for these changes to have impact in the quarters ahead.

Among the G7 countries, Japan faces the most unique set of circumstances. All the other G7 countries face excessive domestic inflation rates and the need for the central banks to raise interest rates sharply. Japan does not.

The weaker yen should help Japanese growth to some extent although it will also raise energy costs as Japan is a fuel importer and fuels are priced in dollars. At the same time, weakening growth in its top two trade partners, China and the U.S., are impediments to Japan growing at a faster pace. China continues to struggle with problems in its real estate market and to implement sporadic lockdowns as it continues to pursue its zero COVID policies. The U.S., for its part, has seen some uneven economic statistics. The U.S. unemployment rate has increased but job growth is still substantial, wage growth is still excessive, and inflation is still rampant - as a result the economic slowing in the U.S. has been spotty and inconsistent. More Fed hikes lie ahead. Still, in the first half of the year, the U.S. economy logged a small net contraction, while the early estimates for the third quarter peg growth around 1 ½% or so- a relatively mild growth rate compared to what the U.S. had experienced in 2021.

On balance, revisions to Japanese GDP are encouraging but they don't mark any watershed changes in Japanese policy, nor should they have any particular effect on current exchange rate dynamics. But the upward revisions do seem to put Japanese growth on firmer footing.

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