Japan at Top of the Growth Table Among G-7 PeersBy
Private consumption and business spending beat expectations
Stronger wage gains are still needed to spur faster inflation
Japan’s second-quarter gross domestic product data put the nation in an unexpected spot: at the top of the growth table among Group of Seven advanced economies.
The strongest domestic demand in years helped drive Japanese GDP to a sixth consecutive quarter of expansion, elevating hopes for a sustainable recovery in an economy that’s been better known in recent years for tepid inflation and a declining population than beating forecasts.
Stronger consumption at home is seen as key to maintaining momentum, and achieving more progress toward the Bank of Japan’s still distant 2 percent inflation goal. Exports had been doing most of the heavy lifting as Japan’s economy grew in recent quarters, but the figures for the three months through June show domestic demand was a bigger contributor to the 4 percent annualized growth.
"That makes Japan the fastest-growing economy in the G-7 this quarter by our reckoning and may restart the chatter about the BOJ’s eventual QQE exit strategy," Rob Carnell, chief economist for Asia at ING in Singapore, wrote in a research note. "This was not one of those fluky one-offs that was caused by a surge in inventories that will be worked down in coming quarters, or one of those random spikes caused by exports and imports growing out of sync."
With Canada, Germany and Italy yet to release their second-quarter figures, Japan could be knocked off its pedestal, but consensus forecasts make it a clear leader for now. And it should be noted that the preliminary data from Japan’s Cabinet Office is subject to revision, with recent experience indicating a modest downgrade is possible.
Japan’s private consumption and business spending hit the highest levels since the first quarter of 2014, before a sales-tax increase in April of that year sent the economy into a long slump.
Private consumption adjusted for inflation, which accounts for about 57 percent of real GDP, gained 0.9 percent from the first quarter. Business spending advanced 2.4 percent. In current yen terms, the size of the economy rose to 545 trillion yen ($4.97 trillion).
So far, inflation has lagged behind growth, even amid the tightest labor market in decades. Consumer prices excluding fresh food rose 0.4 percent in June, a pace well below the BOJ’s target.
"We are in this transition phase and we have just begun to see more convincing evidence that domestic demand is finally picking up," Kathy Matsui, chief Japan strategist at Goldman Sachs Group Inc., said on Bloomberg TV after the GDP report. "I don’t think that consumption would’ve been this strong had we not seen wages at least pick up to some degree.”
Business investment is also on the rise. Large companies across all industries plan to raise fixed investment by 8 percent for the year through March 2018, according to the BOJ’s Tankan survey released in July.
A BOJ spending gauge is also pointing to a recovery. Its real consumption activity index stood at 105.2 in June this year, compared with a record high of 108.6 in March 2014, the month before the sales-tax increase. BOJ Governor Haruhiko Kuroda has repeatedly said the labor shortage would push up wages and prices.
That’s not happening much yet, and the weak inflation is still welcomed by consumers, according to Junichi Makino, chief economist at SMBC Nikko Securities Inc. "The fact that prices are not rising much is improving consumer sentiment," Makino said.
The next test for the economy is for businesses to offer significant pay hikes, and for households to keep spending as consumer prices rise.
— With assistance by Enda Curran, and Isaac Aquino