Japan Q2 growth misses forecasts on weaker spending, investment

In the second quarter of 2023, Japan's economy expanded at a slower-than-anticipated rate of 1.1% year-over-year, according to government data released on Monday. This growth figure fell short of market expectations, which had predicted a 2.0% increase, and also trailed the previously revised 1.9% growth rate from the previous quarter.

Kazutaka Maeda, a senior economist at Meiji Yasuda Research Institute, noted that the growth was positive, but the details were less robust than anticipated. He suggested that the weaker performance could be attributed to temporary factors, and did not foresee any adverse impact on the Bank of Japan's (BOJ) upcoming interest rate decision, which is expected to be made in September. The quarterly growth of 0.3% was below the median estimate of a 0.5% increase.

Private consumption, which constitutes more than half of Japan's economic output, remained stagnant in the second quarter, failing to meet analysts' expectations of a 0.5% rise. This lack of growth in consumption was partly due to one-off factors, such as the impact of free education measures and higher tobacco prices. Additionally, capital spending, which is a crucial driver of private demand, contracted by 1.2% in the quarter, as opposed to the market forecast of a 0.4% increase.

Yoshiki Shinke, a senior executive economist at Dai-ichi Life Research Institute, attributed the decline in consumption and capital spending to temporary factors, including the shift in expenditures towards government consumption due to initiatives like free school lunches, and disruptions caused by the Middle East conflict. He also mentioned that these issues were beginning to subside, and corporate investment intentions remained strong.

Net external demand, encompassing exports minus imports, contributed 0.5 percentage point to Japan's economic growth. Japanese exports continued to perform well, driven by robust demand in the United States for Japanese hybrid vehicles and sustained global investment in artificial intelligence-related technology, particularly in semiconductor-related equipment and components.

However, analysts cautioned that rising import costs and mounting upward price pressures may eventually exert downward pressure on consumer spending later in the year. There was also a concern that private consumption might weaken in the upcoming July-September quarter, following policy and regulatory changes that temporarily boosted demand for durable goods such as automobiles and air conditioners in the April-June period.

A recent survey by the Japan Center for Economic Research indicated that 37 economists forecast GDP growth to slow to an average of 0.05% in the July-September quarter.