Japan Economic Growth Revised Down as Firms, Consumers Cut Back

Japan’s economy expanded at a slower pace than initially estimated as businesses and consumers spent less, an outcome that points to the fragility of the growth achieved last quarter as Prime Minister Fumio Kishida mulls further support measures.

(Bloomberg) — Japan’s economy expanded at a slower pace than initially estimated as businesses and consumers spent less, an outcome that points to the fragility of the growth achieved last quarter as Prime Minister Fumio Kishida mulls further support measures.

Gross domestic product grew at an annualized 4.8% from the previous three months with the expansion almost entirely reliant on overseas demand, revised figures from the Cabinet Office showed Friday. That was a smaller gain than the preliminary reading of 6% and came in well below economists’ forecast of 5.6%. 

Business spending figures were revised to show outlays slipping 1% on a non-annualized basis. Previously the government estimated that capital investment was flat versus the first quarter. Consumer spending also fell more than first forecast.

Separate data showed wage growth slowed sharply to push real pay down by 2.5% after accounting for the impact of inflation.

Friday’s figures fit in with indications that sluggish domestic conditions are exerting a drag on the country’s recovery. The data support Kishida’s view that households and companies need more help as they struggle in the face of the strongest inflation in decades.

The Bank of Japan may also see the weakness in domestic-led spending pointing to the need to continue its ultra-easy policy to stimulate activity as prospects for external demand dim due to a slowdown in China and steady monetary tightening in other key economies. 

“Like the initial reading, the headline figure is coming out stronger than the real picture of the economy,” said Taro Saito, head of economic research at NLI Research Institute. “I expect the economy to contract in the third quarter as external demand drops after rising a lot.”

A closer look at the data shows annualized export growth of 12.9% and a double-digit fall in imports helped give the overall growth figure a flattering gloss, while companies and consumers cut spending by more than initially estimated.

The growth still leaves the economy slightly larger than its size before the pandemic and a sales tax hike in late 2019, but private consumption remains below that level and is still weaker in real terms than it was back in the summer of 2014.

As inflation of more than 3% eats into household spending, policymakers are concerned that the post-pandemic recovery is at risk of stalling, especially if the global slowdown continues. That’s adding to reasons for Kishida to extend existing support and offer some economic relief measures, with his falling approval ratings adding another motive for taking action.

“Current oil prices and currency movements are leading to faster-than-expected inflation,” said Kenta Domoto, a consultant at Mitsubishi Research Institute. “Without Kishida’s subsidies, consumers would face a big gasoline price jump. This would have a considerable negative impact on consumer sentiment.”

Still, some economists also see enough factors pointing to renewed growth even if the economy shrinks slightly in the meantime, suggesting that Kishida doesn’t need to splurge big on economic measures. 

Figures released last week by the Cabinet Office showed that overall demand in the economy has started to outstrip supply, a factor that should help support lasting price gains and help stabilize economic growth if it continues. A shortfall in demand has often been used to justify extra spending by the government in the past. For NLI’s Saito, this shows there is little need for another big economic package from the government.

What Bloomberg Economics Says…

“The result will concern the Bank of Japan because it shows a stark absence of domestic-demand drivers for inflation, and also because growth is so lopsidedly dependent on exports — which are almost certain to weaken this quarter and next.”

— Taro Kimura, economist

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The wage data showed only a 1.3% gain in nominal pay in July, falling well short of expectations as the central bank looks for higher pay to solidify a stable inflation trend. Weaker purchasing power will also keep a lid on any future gains in consumer spending. 

Hourly pay gains of 4% among part-time workers offered a more encouraging sign of upward momentum in that segment of the labor force.

Still, other factors may also come into play, especially with the yen still at levels against the dollar that prompted intervention in currency markets last year. A further slide that adds to inflationary pressure will cause concern for both Kishida and the BOJ, since that could make imports more expensive, hitting households further.

“From the standpoint of economic fundamentals, I don’t think the BOJ needs to change its policy toward normalization,” Saito said. “But it may need to make policy more flexible given rising oil prices and the yen’s weakness — and it’s weakened a lot.”

–With assistance from Ryotaro Nakamaru and Yuko Takeo.

(Adds economist comments, more details from report)

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