Japan’s economy has demonstrated resilience yet again, marking its third consecutive quarterly expansion, according to provisional government data released on Tuesday. Robust export growth emerged as a key contributor, propelling the world’s third-largest economy to achieve an impressive annualized 6% expansion in the second quarter, surpassing market forecasts.
Economists surveyed by Reuters had predicted a 3.1% growth for the April-June quarter. However, the actual gross domestic product (GDP) figures exceeded expectations, revealing a more moderate quarterly expansion of 1.5%, outperforming the anticipated 0.8% growth.
In response to the positive economic news, the benchmark Nikkei 225 index enjoyed a slight uptick, gaining nearly 1% in trading. Simultaneously, the Japanese yen managed to recover some of its losses against the U.S. dollar. Despite these movements, Japanese government bonds across various tenures remained relatively stable.
While Tuesday’s GDP data suggests a continuing post-Covid recovery for Japan’s economy, experts are tempering long-term optimism due to the narrower gap between reality and expectations in quarterly growth.
Marcel Thieliant, Head of Asia-Pacific at Capital Economics, emphasized, “Japan’s economy expanded at an extremely rapid pace last quarter, but we expect a renewed slowdown across the second half of the year.”
He further noted, “However, the details of the report weren’t as impressive as the headline. Instead, nearly all of the increase in output was driven by a 1.8%-point boost from net trade. That marked the second-largest contribution from net trade in the 28-year history of the current GDP series, with only the bounce back in exports from the first lockdown at the beginning of the pandemic providing a larger boost.”
A standout feature of the report was the rebound in exports, which surged by 3.2% compared to the previous quarter. This notable increase was largely attributed to a spike in car shipments. In contrast, imports experienced a significant dip of 4.3% over the same time period.
Delving beyond the optimistic headline GDP growth figures, it becomes evident that the Bank of Japan may soon shift away from its ultra-easy monetary stance.
An unexpected annualized drop of 0.5% in private consumption expenditure, combined with subdued capital expenditure, suggests muted domestic demand, despite the first sequential increase in employee compensation over seven quarters.
This shift comes as inflation has consistently exceeded the Bank of Japan’s 2% target for 15 consecutive months. In a noteworthy move last July, the Japanese central bank decided to loosen its yield curve control over the 10-year Japanese government bond, aiming to establish a more sustainable ultra-easy monetary stance.
As Japan’s economy demonstrates both resilience and fragility, the nation is faced with navigating a delicate economic landscape that necessitates careful policy considerations. The GDP surge reflects the resilience of the nation’s economic recovery, while the underlying factors signal potential challenges ahead. Balancing these dynamics will be crucial for Japan’s sustained growth and financial stability in the months to come.
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