Japan beats G-7 peers as domestic demand fuels GDP

TOKYO • Japan’s second-quarter (2Q) gross domestic product (GDP) data put the nation in an unexpected spot: At the top of the growth table among Group of Seven (G-7) 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 (BoJ) still distant 2% 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% annualised 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 (quantitative and qualitative easing) 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 2Q 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 1Q 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% of real GDP, gained 0.9% from the 1Q. Business spending advanced 2.4%. In current yen terms, the size of the economy rose to ¥545 trillion (RM21.25 trillion).

So far, inflation has lagged behind growth, even amid the tightest labour market in decades. Consumer prices excluding fresh food rose 0.4% 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% for the year through March 2018, according to the BoJ’s Tankan survey released in July. — Bloomberg