TOKYO – Japan’s economic growth unexpectedly slowed in the three months through June as capital spending continued to slump in the face of uncertainties stemming from the Middle East conflict.
Real gross domestic product grew 1.1 per cent on an annualised basis in the second quarter, according to a Cabinet Office report on Aug 17. That was slower than a revised 1.9 per cent pace in the previous quarter and fell short of economists’ forecast for 2 per cent growth, while still marking a third consecutive expansion.
Capital investment fell 1.2 per cent on a non-annualised basis, a steeper decline than the revised 1 per cent drop in the previous period, and missing the estimate for 0.5 per cent growth.
“Consumption was quite weak,” said Keiji Kanda, chief economist at Daiwa Institute of Research. “The decline in nondurable goods was larger than expected, and considering that consumption was not as strong as expected and that capital spending was weak, my assessment is that the overall result was not particularly strong either.”
The figures came as Japan’s economy faces fallout from the conflict in the Middle East, which has pushed up prices for fuel and products made with petroleum while also upending some supply chains. The unexpected slowdown could complicate the Bank of Japan’s policy communications as it weighs the timing of its next rate increase.
As of Aug 17, traders were seeing an 80 per cent likelihood of the BOJ hiking its benchmark rate when it next decides policy on Sept 18, according to pricing in the overnight swaps market.
Among other drags on growth, private consumption came in flat, missing the consensus estimate for a 0.4 per cent advance after rising a revised 0.5 per cent in the previous quarter. That result likely reflects a reluctance to spend among shoppers frustrated with rising costs of living.
The indications of weak domestic demand will be a concern for Prime Minister Sanae Takaichi, whose approval ratings have begun to dip some six months after a landslide electoral triumph as consumers cope with persistent increases in prices for daily necessities, including food. Takaichi has deployed subsidies to put a cap on utility costs, and now plans to cut the sales tax on food to 1 per cent for two years starting in April.
The GDP figures were somewhat at odds with a string of generally upbeat corporate data releases during the period. The BOJ Tankan survey showed business sentiment among large manufacturers advanced in June to the highest since 2018, while the gauge for large non-manufacturers hovered at the strongest level since 1991.
Industrial output rose each month from the end of the first quarter, with projections pointing to further gains in July and August, and the manufacturing PMI remains elevated after rising in April to the highest in 12 years.
The decline in business investment came even as corporate earnings have stayed relatively strong, with Japanese companies’ current profits rising more than expected from a year earlier in the three months through March.
To be sure, companies face higher operating costs. Prices for corporate goods continued to rise at an elevated pace in July, advancing 7.2 per cent from a year earlier, pressuring companies to raise prices for their customers.
The government has sought to alleviate tightness in the energy market by diversifying its sources of energy as the Strait of Hormuz remains effectively closed. June trade data showed the US accounting for almost a third of Japan’s oil imports compared with just 7 per cent in February.
Looking ahead, Japan’s economy faces a mix of supportive and adverse factors. Still, solid wage gains resulting from annual pay negotiations and government subsidies are expected to help underpin household spending, economists said.
“Consumption was weaker than expected, but compensation of employees increased from the previous quarter and real wages have continued to rise from a year earlier, so taking those factors into account, I don’t think the underlying economic recovery trend has broken down,” Kanda said. BLOOMBERG
