Japan Q3 GDP Grows on Strength of Exports

GDP expanded by an annualized 2.2% versus estimates of 0.8% growth

Japan’s Q3 FY16 gross domestic product (GDP) expanded by an annualized rate of 2.2%, according to initial estimates released by Japan’s Cabinet Office on Monday, November 14th, 2016 (estimate of 0.8% growth), suggesting that the economy has regained some momentum after a lull period. A rebound in exports made up for continued weak spending by consumers and companies, but underscored a potentially fragile export-reliant economic recovery in a scenario when Republican Donald Trump’s unexpected victory in the U.S. presidential elections added to the uncertainty over the global economic climate. Exports grew on the strength of rising value of shipments in August 2016 and September 2016, when adjusted for price changes.

Source: Cabinet Office, Japan
Source: Cabinet Office, Japan

Almost all of the GDP growth was due to robust exports, which contributed 1.8% to the total, implying better external demand in Asia. However, stagnant wages have left most Japanese consumers tightfisted; private consumption, which accounts for roughly 60% of GDP, inched up a mere 0.1%, while business spending was unchanged. Capital expenditure, a key component of GDP, was flat, following a 0.1% decline in Q2 FY16, as gains in the yen weighed on business investment. External demand, or exports minus imports, added 0.5% to GDP, due to higher exports and falling imports caused by yen gains, oil price declines, and weak domestic demand.

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The Q3 FY16 GDP growth, which marked the third straight quarter of expansion, translated into a quarterly expansion of 0.5%, versus forecasts of a 0.2% gain, and a 0.7% increase in Q2 FY16. Government consumption rose 0.4% from the previous quarter, adding 0.1% to quarterly growth. The GDP deflator fell 0.1% from a year earlier. Private inventories subtracted 0.1% from GDP in Q3 FY16.

Relief for Abe

The surprisingly strong GDP expansion, the biggest since early 2015, will likely provide some relief to Japanese Prime Minister Shinzo Abe as he faces the possible economic fallout from Donald Trump’s U.S. election victory. In the past, Trump has strongly opposed a trade pact at the center of Abe’s economic reform policies; if his campaign rhetoric on trade does convert into a policy act next year, Japanese companies could take a hit in one of their biggest markets. Combined with a recent weakening of the yen, the latest GDP figures reduce pressure on the Bank of Japan (BoJ) to introduce more monetary stimulus into the economy.

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Positive outlook

Although boosting consumption remains a problem in the near term, Japan’s growth outlook for 2017 remains fairly positive. The BoJ added to its economic stimulus in September 2016 by capping 10-year bond yields at 0% and promising to overshoot its inflation target of 2%. Abe’s government is also launching a fresh fiscal stimulus over the next few months.

Haruhiko Kuroda, BoJ governor, stated on Monday:

“Extremely powerful economic stimulus measures are being implemented, both on the monetary and fiscal side.”

While real GDP growth was robust, nominal growth, which does not adjust for price changes, was significantly weaker at 0.8%, reflecting Japan’s renewed dip into deflation. That in turn has led to weak wage demands, removing the spending power needed for higher consumption.

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