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Japanese economic growth likely to slow in Q3, core CPI to strengthen to 0.8 pct in September

The Japanese economic growth surprised to the upside in the second quarter and seems set to remain at or above potential in the coming quarters. But, inflation lags might not narrow until the second half of 2018. The second quarter economic growth was mainly driven by domestic demand, particularly private consumption.

From the third quarter, net exports are expected to underpin economic growth again as public investment begins to fade. According to Barclays, core CPI inflation is expected to strengthen gradually to a peak of 0.8 percent year-on-year in September and then soften towards 0.3 percent in the first half of 2018 before turning back up in the second half of 2018.

The third quarter is likely to bring some reactionary softness in consumption and subdued growth in public investment as the impacts of the FY2016 second supplementary budget start to fade.

“Even so, we forecast real GDP growth of 0.7 percent q/q saar (roughly matching potential) for this period, assuming offsetting support from capex and net exports”, stated Barclays.

Reflecting the strong overseas demand and favourable market conditions, the QUICK Tankan DI of sentiment among manufacturers was up to +31 in August, its highest level since September 2007.

Meanwhile, public investment seems set to negative contribute to growth in the fourth quarter of this year and the first quarter of 2018 in the absence of additional fiscal stimulus; however, private consumption is expected to sustain growth of about 0.3 to 0.4 percent quarter-on-quarter on further gradual improvements in the employment and income environment.

“We also look for continuing modest support from capex and net exports, enabling real GDP growth of around 1.5 percent q/q saar”, added Barclays.

At 20:00 GMT the FxWirePro's Hourly Strength Index of Japanese Yen was highly bullish at 132.749, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -71.638. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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