Japan Q2 GDP Slips as Consumer Spending and Wages Decline

09 Sep, 2023

Japan Q2 GDP Slips as Consumer Spending and Wages Decline

In Japan's recent economic landscape, the release of second-quarter GDP data paints a less optimistic picture than initially estimated. The country's economy experienced a weaker-than-expected growth trajectory, coupled with a concerning decline in wages during July, raising questions about the central bank's projections for a robust recovery based on solid domestic demand. This revision in GDP data reveals discouraging trends in both capital expenditure and private consumption throughout the April-June period, underscoring the fragility of Japan's economy.

Real wages, adjusted for inflation, have persistently fallen for the 16th consecutive month in July, indicating that households continue to grapple with the impact of rising prices, which could negatively impact consumption. A potential explanation for this decline lies in the caution exhibited by Japanese manufacturers regarding investments, potentially influenced by weak exports to China.

While the hope was that service-sector firms would compensate for these challenges, sluggish consumption trends threaten to deter such investments. The revised GDP data reports an annualized growth rate of 4.8 percent for April-June, significantly lower than the initial estimate of 6.0 percent and market forecasts, which anticipated a revised 5.5 percent expansion. This downgrade is primarily attributed to a notable 1.0 percent drop in capital expenditure, undermining the Bank of Japan's belief that robust corporate spending would underpin the country's post-pandemic recovery.

Private consumption, representing over half of Japan's economy, also witnessed a decline of 0.6 percent quarter-on-quarter during the April-June period, emphasizing the challenges faced in this critical economic segment. Exports remained relatively strong in April-June, but a significant dip in shipments to China, with an 8th consecutive monthly decline, raised concerns. Overall exports showed a 5.0 percent year-on-year decline in the first half of August, indicating the global economic slowdown's impact on Japan.

Despite these difficulties, Japan managed to record a substantial current account surplus for the month of July, driven by weakened domestic demand leading to declines in imports. However, given the persisting uncertainties, it's not surprising that experts, such as Takeshi Minami of Norinchukin, express concerns about the potential for two consecutive quarters of contraction later in the year. Consequently, the likelihood of an early end to the ultra-loose monetary policy appears to be diminishing.

Japan's economy has experienced a delayed recovery from the COVID-19 pandemic, with rising living costs and faltering global demand clouding the overall economic outlook. In light of these uncertainties, Bank of Japan policymakers remain committed to maintaining ultra-loose monetary policy until cost-driven inflation transforms into price increases driven by domestic demand and higher wage growth.