Another quarter of stronger-than-expected growth did little to ease concerns that trade tensions and a tax hike are set to slow Japan’s export-driven economy.
GDP defied expectations again, growing an annualized 1.8 percent in the second quarter from the previous three months, as a surge in consumer spending and better-than-expected capital investment offset an export slump.
That follows revised growth of 2.8 percent in the first quarter, adding up to Japan’s two best quarters since the first half of 2017.
Yet resilient domestic demand might not cushion the effect of an escalating US-China trade dispute, and it remains to be seen whether the nation could survive a domestic sales tax hike set to take effect in just two months.
“The second quarter was good, but I see far more uncertain factors than optimistic ones when I look beyond this summer,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co in Tokyo. “The results made the economy look better than it is in reality.”
Consumer spending rose the most in two years and was the biggest growth driver during the second quarter.
Yet it got a big lift from a 10-day public holiday and shoppers making purchases of durable goods, such as air conditioner, ahead of the October tax increase.
Japanese Prime Minister Shinzo Abe’s government has prepared a series of measures to soften the blow for consumers, after a bigger hike in 2014 sent consumption into a tailspin.
However, spending is not likely to continue at the pace seen in the second quarter, especially after the tax hike takes effect, and particularly if accompanied by a trade-war fueled global downturn.
Capital spending has held up so far despite the export slump, thanks partly to the need for labor-saving technology and ongoing demand for redevelopment ahead of next year’s Olympics.
Capital investment rose 1.5 percent from the previous quarter, nearly twice as much as economists forecast.
Still, the trade war and recent market turmoil are weighing on sentiment. Japanese exports, a key driver of the economy, have already fallen for seven straight months.
A stronger yen poses risks to the profits of Japanese exporters, which might hit capital investment at home.
Exports fell 0.1 percent in the second quarter from the first, and net exports cut 1.2 percentage points from annualized GDP figure, though that was partly due to a rise in imports, particularly oil and energy.
“Fiscal stimulus and last-minute purchases ahead of the October sales-tax increase are likely to support growth in 3Q. The recent solid consumption means last-minute buying may be weaker than was the case before the last sales-tax hike in 2014,” senior economist Yuki Masujima said in a report.
Another factor driving the unexpected second-quarter growth was public spending, which topped estimates. Economists said the delayed impact of a supplementary budget in the fiscal year ended in March.
Growth is expected to continue in the third quarter, particularly if consumers keep spending ahead of the tax increase, before a sharp contraction in the fourth. Still, if the US-China trade dispute continues, or worsens, all bets are off.
“We shouldn’t be optimistic about the outlook for the economy because of today’s data,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “Trade tensions are escalating and we have a sales-tax hike coming up.”
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