Japan trade surplus shrinking to JPY590 billion (US$5.5 billion) in June 2019, from a year ago surplus of JPY728 billion caused of weak global demand and United States - China trade war - Photo by AP

JAKARTA (TheInsiderStories) – Japan’s real GDP growth stood at 1.8 percent in the second quarter (2Q) of 2019 compared to same period of last year. The Japanese economy advanced 0.4 percent quarter-on-quarter (QoQ) in the three months to June 2019 following an upwardly revised 0.7 percent growth in the previous period.

This marked the third straight quarter of GDP expansion, supported by robust private consumption and solid business investment while exports contracted much softer.

GDP Growth Rate in Japan averaged 0.49 percent from 1980 until 2019, reaching an all time high of 3.20 percent in the second quarter of 1990 and a record low of -4.80 percent in the first quarter of 2009.

The unexpectedly solid increase is largely thanks to domestic demand, which contributed 0.7 percentage point to the QoQ growth of real GDP, offsetting sluggish net exports, recent data released by the country’ Cabinet Office showed.

The major driver for domestic demand was private consumption (up 0.6 percent QoQ), reflecting rebounds in the consumption of durable goods and services. The extra-long series of holidays boosted sales of autos and spending on travel and other leisure.

Private capital expenditure also continued to rise, moving up 1.5 percent q/q. An increase in imports of aircraft and manufacturers’ shipments of railroad rolling stock suggested larger investment in transport equipment.

Steady demand for machinery to counter severe labor shortages also probably the factor to underpin a continued increase of capital expenditure. The better-than-expected domestic demand largely also reflected solid public demand, as government consumption rose 0.9 percent QoQ, reflecting front-loaded spending to mitigate a prospective slump following a surge in front-loaded demand ahead of the tax increase, planned for October 2019.

Public investment continued to rise (1.0 percent QoQ), which was in line with the government’s plans to boost reconstruction and measures to prevent natural disasters.

According to Harumi Taguchi, the principal economist at IHS Markit, solid results driven by domestic demand in 2Q will reassure the government to go ahead with the consumption tax increase in October 2019 as scheduled.

While the Bank of Japan (BoJ), at its July Monetary Policy Meeting, started considering additional monetary easing if there is a greater possibility that the momentum towards achieving its price stability target is losing, the positive 2Q results mean the bank will probably not need to act unless global uncertainties lead to financial turmoil over the near term.

That said, the Jibun Bank Japan Manufacturing Purchasing Managers’ Index by IHS Markit signals a continued decline in exports with global uncertainties, particularly the escalation of the United States (US) – China trade tensions.

Also, recent yen appreciation could suppress corporate profits, which could delay investment plans and make corporations more cautious about the wage increase. Prolonged weakness in corporate and consumer sentiment could delay a recovery in domestic demand from a dip after the consumption tax increase.

The key to sustainable growth is a strong domestic demand after the consumption tax hike. The government is likely to plan additional fiscal stimulus measures to avoid larger downside risks than its current projection.

However, the level of high growth in public spending in June is unlikely to be sustainable, given that the government will also need to consider its fiscal discipline and narrow the primary balance deficit.

To reflect 2Q results and the upward revision to real GDP growth for 1Q, IHS Markit will revise up its real GDP forecast for 2019 but revise down its forecast for 2020.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com