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Japan’s Q2 GDP surpasses expectations with strong export growth.

ReutersAugust 15, 2023

Japan’s ‍Economy Surges in Q2, But Challenges Remain

By Tetsushi Kajimoto and Kantaro Komiya

TOKYO (Reuters) – Japan’s economy grew much ‍faster than expected in April-June, driven by robust auto exports and‌ a surge in⁣ tourist arrivals. This strong performance ‍helped offset the drag from a slowing post-COVID⁣ consumer recovery, although concerns about a global recession still cloud the outlook.

The 6.0% annualised growth in Japan’s economy translated into a quarterly gain of 1.5%, surpassing median⁣ estimates of 0.8% in a Reuters poll and bringing gross domestic ‍product (GDP) ⁣to a record high.

This marks the⁤ fastest expansion ‍since the final‍ quarter of 2020, following a⁢ revised 3.7% growth in January-March.

While the⁤ headline GDP⁢ data provides some relief to policymakers seeking to balance economic growth ⁤with sustainable inflation, it masks underlying weakness in the household sector.

Marcel Thieliant, head of Asia-Pacific at Capital Economics, warns that ‍the export-driven momentum in growth is unlikely to be sustained.

“And while capital goods exports bounced back ‌in June as the largest falls in overseas investment are now behind us, we do not expect a‌ vigorous recovery,” Thieliant said.

Private ⁢consumption,⁣ which accounts for more⁣ than half of the economy, fell 0.5% quarter-on-quarter in the April-June period, primarily due to⁣ price hikes⁢ impacting sales⁣ of food and household⁣ appliances.

On the other hand,⁤ exports expanded 3.2% in the second quarter, led by car exports and inbound tourism, while capital expenditure remained ‍flat.

Japanese automakers have benefited from a weaker yen, which has helped boost profits amid declining sales in China and the challenges of transitioning to electric vehicles.

Strong demand⁣ from the United⁤ States and Europe has also supported exports, and the post-COVID boom in‍ foreign tourists ⁢has given the economy a much-needed tailwind.

This boost in external demand, or net exports, contributed 1.8 percentage points to second‌ quarter growth. However,‍ this net contribution was ⁢also influenced ⁤by ⁤a decline ‌in imports ‌for a‌ third ⁣consecutive quarter, which have struggled due to yen ⁣weakness.

Meanwhile, domestic demand shaved off 0.3 of a percentage point ⁤from growth.

“The biggest factor was a decline in imports ⁤that pushed up GDP. It⁣ doesn’t mean a strong recovery in the Japanese ⁤economy,” said Takumi Tsunoda, ⁤senior economist at Shinkin Central Bank Research Institute.

Despite these challenges, there ‍are some positive signs. Real wages have turned positive for⁢ the first time in seven quarters, and corporate appetite ⁤for investment remains solid, according to Economy Minister Shigeyuki Goto.

“Against this backdrop,‍ we expect moderate economic ‍recovery to continue, although⁤ caution is needed due to downside risks from⁢ the global economy and the effects of price⁣ hikes,” Goto said.

The Bank of Japan recently took steps to allow long-term interest rates⁤ to rise more, signaling a gradual shift away from massive monetary stimulus.

(Reporting by Tetsushi Kajimoto and Kantaro Komiya; Graphics⁣ by Pasit Kongkunakornkul. Editing by Sam ⁢Holmes)

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