Japan's Q2 GDP Revised Downward Due to Weak Spending and Declining Wages

10 Sep, 2023

Japan's Q2 GDP Revised Downward Due to Weak Spending and Declining Wages

Japan's economic performance in the second quarter has fallen short of initial estimates, while July witnessed a significant decline in wages, raising concerns about the central bank's optimistic projections regarding a robust domestic demand-led recovery.

Revised GDP data for April revealed a decline in both capital expenditure and private consumption, underscoring the fragility of Japan's economy. This vulnerability is exacerbated by the headwinds stemming from weakening Chinese and U.S. growth.

In July, real wages, adjusted for inflation, continued their 16th consecutive monthly decline, signaling that households are still grappling with the impact of rising prices, which could deter consumption.

Takeshi Minami, the chief economist at Norinchukin Research Institute, expressed concerns about Japanese manufacturers' cautious approach to investment due to weak exports to China. He noted that the hope lies in service-sector firms, but sluggish consumption might hinder their spending as well.

Revised data indicated that Japan's economy grew at an annualized rate of 4.8% in April-June, down from the preliminary estimate of 6.0% and below the market's anticipated 5.5% expansion. The main reason for this downgrade was a 1.0% drop in capital expenditure, casting doubt on the Bank of Japan's expectation that strong corporate spending would support the post-pandemic recovery, exceeding the market's forecast of a 0.7% decline.

Private consumption, accounting for over half of the economy, declined by 0.6% quarter-on-quarter in April-June, compared to the preliminary 0.5% decrease. Meanwhile, exports remained robust, with net external demand contributing 1.8% points to GDP growth, unchanged from the initial reading.

However, exports to China experienced a 13.4% slump in July, marking the eighth consecutive monthly decline. Overall, exports decreased by 5.0% year-on-year in the first half of August, following a 0.3% decline in July, indicating the adverse effects of the global economic slowdown on Japan's economy.

Due to weak domestic demand causing import declines, Japan's current account surplus reached a record high in July, as indicated by separate data released on Friday.

Takeshi Minami of Norinchukin expressed concerns about the possibility of two consecutive quarters of economic contraction in Japan later this year, noting that the likelihood of an early exit from ultra-loose monetary policy is diminishing.

Japan's economic recovery from the COVID-19 pandemic has been delayed this year, as rising living costs and weakening global demand cloud the economic outlook. In response to these uncertainties, Bank of Japan policymakers have emphasized their commitment to maintaining ultra-loose monetary policy until recent cost-driven inflation transforms into price increases driven by domestic demand and higher wage growth.