Japan’s GDP likely to have grown in Q2 on fiscal intervention

The upcoming second quarter GDP data of Japan is expected to show that the economy expanded 0.3 percent on sequential basis, continuing with the upbeat trend witnessed in the first quarter when the GDP grew 0.5 percent quarter-on-quarter, stated Societe Generale in a research report. Even if there are worries of a downturn in the second quarter after the leap-year effect in the first quarter, pace of the economic growth has continued to be intact in the second quarter.

But given the reaction of  the leap-year effect and the longer than usual Golden Week holidays in May, there is a possibility that the second quarter figures might be pushed up or down by technical factors because of seasonality, according to Societe Generale. The continuing uncertainties in the global economy and the financial markets since the start of 2016, along with the Brexit vote, have been a drag on corporate activity and sentiment.

Capital investment in the private sector is expected to have dropped 0.5 percent quarter-on-quarter in the second quarter, following a drop of 0.7 percent in the first quarter. Moreover, inventory is likely to have dropped again, subtracting 0.2 percentage points from the GDP growth as companies have been hesitant in increasing inventory while uncertainties persist, added Societe Generale.

Given that the rebound in production continues to be slow, imports of materials remain weak. Real imports are expected to have dropped 0.5 percent quarter-on-quarter, the third straight quarter of decline. Meanwhile, exports are expected to have remained flat as global trade activity continues to be stagnant.

On the other hand, household activity seems to be indicating signs of recovery. The labor market continues to be quite tight, while wages have begun rising. Moreover, the summer bonuses in 2016 rose robustly again due to continuing firm corporate profit levels.

“Thus, despite equity prices falling and stagnating, real consumption likely rose +0.4 percent qoq, an increase for two consecutive quarters”, added Societe Generale.

Mortgage lending rates have dropped as the Bank of Japan has implemented negative interest rate policy. This has had a positive impact on residential investment that is expected to have rebounded by 2.5 percent quarter on quarter for the first time in three quarters. Weak corporate activity in the second quarter is expected to have been countered by a relatively solid household activity and therefore the second quarter GDP growth is mostly due to the effect of government’s fiscal policy action, said Societe Generale.