Japan’s Economic Growth Beyond Expectation, Lead Asia Pasific Market Favors

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JAKARTA (TheInsiderStories) – Japan’s economic growth in the second quarter (Q2) of 2017 expanded 4 percent on the quarter on quarter (q/q) basis compared to last year, IHS Markit said. The unexpectedly strong growth reflected accelerated improvement in consumer spending and private capital expenditure , as well as solid public investment.

Exports showed the first decline in five quarters, while imports continued to increase. Nevertheless, consumer spending rose 0.9 percent q/q for the sixth consecutive quarter of increase. The solid increase was due largely to the continued growth in spending for durable goods.

Growth in spending on non-durable goods also turned positive for the first time since Q1 2016. A 0.7 percent q/q increase in employee compensation also supported consumer spending, in line with an increase in employment despite persistently weak wage increases.

Capital expenditure rose 2.4 percent q/q, reflecting an ongoing recovery in industrial production and demand to counter labor shortages with machinery and equipment. Private residential investment also continued to rise (by 1.5 percent), as steady growth in new housing starts (buoyed partially by softer material prices and historically low mortgage loan rates). A 5.1 percent q/q surge in public investment was attributed to stimulus plans passed by the Diet in January.

IHS Markit commenting real GDP growth in Q3 could soften and even temporarily slip into negative territory. The Nikkei Japan purchasing managers’ index, calculated by IHS Markit, signaled slower growth in July. Public investment is expected to ease, given that the budget for infrastructure expenditure in fiscal year (FY) 2017 is about the same as that in the initial budget for FY2016 and no major supplementary budget is expected for FY2017.

Contractions in seasonal bonuses (-2.98 percent year on year = y/y), according to Japan Business Federation or Keidanren, and heavy rains in Western Japan could combine with cooler temperatures in Eastern Japan to weigh on consumer spending in Q3. The weakness in private machinery orders in Q2 suggests a temporary slowdown in capex, but solid industry outlooks for Q3 and upward revisions to fixed investment plans are likely to fuel upside in later quarters.

Meanwhile, DBS looks that the full-year growth will exceed DBS’s forecast of 1.3 percent and move into the range of 1.5 percent to 2.0 percent. Domestic demand should have the potential to pick up further in 2H17, thanks to the improvement in the labour market, Olympics-related construction demand, and modest rebound in credit growth. The near-term outlook for exports also appears positive, given the cyclical recovery in the global economy and seasonal upswing in the electronics sector.

Having said that, it remains doubtful whether the ongoing growth recovery could push up wages/prices. It is also worth noting that the economy remains vulnerable to external shocks. Against the current backdrop of weak inflation, rising geopolitical risks, and heightened JPY volatility, the Bank of Japan is expected to maintain a cautious stance and keep monetary policy accommodative.

China’s Data Still Unpromising

In the January-July period, fixed-asset investment grew 8.3 percent year on year, down from an expansion of 8.6 percent in the 1H, the National Bureau of Statistics said, mainly to hot days and floods in July that dragged the progress of outdoor projects. Total investment from January to July stood at 33.74 trillion yuan (about US$5.1 trillion). However, the pace was 0.2 percentage point faster than the same period of 2016.

Investment in traditional manufacturing sectors slowed, while that in the high-tech and equipment manufacturing sectors saw fast growth. Investment in environmental sectors surged more than 40 percent year on year. The bureau’s calculation does not include investment made by farmers. It includes projects with planned investment of more than 5 million yuan, as well as all property development.

In Addition, exported industrial output for the month of July rose 6.4 percent on-year, and lower from 7.6 percent expansion in June for the country’s value-added industrial output. July retail sales rose 10.4 percent from a year ago. (YS)