Japan Q2 growth misses forecasts on weaker spending, investment

Japan's economy expanded by 1.1% in the April-June quarter, falling short of forecasts that predicted growth of 2.0%. The weaker-than-expected performance was primarily driven by sluggish household spending and reduced business investment, which partially offset the impact of healthy export figures. Gross domestic product increased at a 1.1% annualized rate, below the upwardly revised 1.9% growth seen in the previous quarter.

Senior economist Kazutaka Maeda from Meiji Yasuda Research Institute noted that while growth was positive, the actual figures were weaker than anticipated. He attributed the slowdown to temporary factors, suggesting that the latest data does not indicate a broader economic weakness or impact on the Bank of Japan's upcoming interest rate hike, expected to occur in September.

The quarterly growth rate translated to a 0.3% increase, slightly below the median estimate of a 0.5% rise. Private consumption, which comprises more than half of Japan's economic output, remained flat and failed to meet market expectations of a 0.5% increase. This was influenced by factors such as the government's tuition-free education measures and higher tobacco prices.

Capital spending, a crucial component of private demand, declined by 1.2% in the second quarter, falling short of the market forecast for a 0.4% increase. Kazushi Shinke, a senior executive economist at Dai-ichi Life Research Institute, suggested that the decline in capital spending could be linked to disruptions and uncertainty stemming from the Middle East conflict. However, he believed that these factors were easing and that corporate investment plans remained robust.

Japan's net external demand, calculated as exports minus imports, contributed 0.5 percentage points to growth. Exports remained robust due to strong demand in the United States for Japanese hybrid vehicles and sustained global investment in artificial intelligence-related equipment and components.

Looking ahead, analysts cautioned that rising import costs and mounting upstream price pressures could eventually affect consumers, potentially leading to a slowdown in spending later in the year. Private consumption might also experience a slowdown in the July-September quarter, following temporary policy and regulatory changes that temporarily boosted demand for durable goods like automobiles and air conditioners during the April-June period.

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