Japan downgrades second-quarter GDP as trade war hits business investment

Weakness in the global economy and worsening trade protectionism have emerged as risks to growth and added some pressure for the BOJ to expand stimulus

TOKYO    -   Japan’s economy grew at a slower pace than initially estimated in the second quarter as the U.S.-China trade war prompted a downward revision of business spending, intensifying calls for the central bank to deepen stimulus this month.

Weakness in the global economy and worsening trade protectionism have emerged as risks to growth and added some pressure for the Bank of Japan (BOJ) to expand stimulus when it meets next week.

The economy grew an annualized 1.3% in April-June, revised Cabinet Office data showed Monday, weaker than the preliminary reading for 1.8% annualized growth and in line with economists’ median forecast.

The annualized growth rate translates into a quarter-on-quarter expansion of 0.3% from January-March, compared with a preliminary reading for a 0.4% gain.

“There’s a possibility growth will turn negative in the October-December quarter,” said Izuru Kato, chief economist at Totan Research.

“If worries about such negative growth deepen (in the coming months), the Bank of Japan could consider lowering interest rates further into negative territory.”

Capital spending rose just 0.2% from the previous quarter, much lower than a preliminary 1.5% rise and the median forecast for a 0.7% increase.

The capex downgrade was due to government statisticians including a demand-side survey of capex in the revised GDP data, which was not in the preliminary figures and showed weakness in the sector.

Stefan Angrick, senior economists at Oxford Economics, said manufacturers cut spending in the quarter amid a re-escalation in U.S.-China trade frictions.

“While investment by non-manufacturers, particularly software-related, maintained robust growth, it was not enough to completely offset the contraction in spending by manufacturers,” Angrick said in a note.

A private sector business survey published last week showed Japanese manufacturing activity declining for a fourth straight month in August while export orders remained in contraction for a ninth month in a row.  Private consumption, which accounts for some 60% of gross domestic product, advanced 0.6% from the previous three months, matching the preliminary reading.  Net exports - or exports minus imports - subtracted 0.3 percentage point from revised GDP growth, signaling the economy is feeling the pain from the global growth slowdown.


The outlook for the world’s third-largest economy remains clouded as risks from declining manufacturing overseas and at home hit exports.

Analysts have also warned of a possible drop in domestic consumption after Japan raises its sales tax to 10% next month, which could hit one of the economy’s few growth drivers.  A separate Cabinet Office survey released on Monday pointed to a bleak outlook for consumption. The survey called the “economy watchers” sentiment index, which measures business confidence among workers such as taxi drivers, hotel workers and restaurant staff, was marginally higher than a more than three-year low hit in July.

The outlook index, indicating the level of confidence in future conditions, slipped to the lowest level since March 2014, the month before Japan’s last sales tax hike in April 2014.

Amid the risks to growth, BOJ Governor Haruhiko Kuroda has kept the door ajar for cutting interest rates further into negative territory, saying last week such move is among the bank’s policy options.

Speculation is growing that the BOJ could ease policy as early as this month to prevent the yen from spiking, an increasingly likely prospect if the U.S. Federal Reserve and the European Central Bank unveil new easing measures.

Growth is expected to hold up in the current quarter partly due to consumer front-loading their purchases ahead of next month’s tax rise, said Totan Research’s Kato.

“But it’s unlikely the pent-up demand in the July-September quarter will be as strong as ahead of the previous consumption tax hike in April 2014,” he said.

The consumer sector has been one of the few bright spots for the economy, which has expanded for three straight quarters, although the pace of growth has slowed.

Household spending rose for an eighth straight month in July, marking the longest run of expansion since comparable data became available in 2000.

But that may not be enough to shield Japan’s service sector from a slump in exports, sagging business sentiment and a contraction in manufacturing.

Japan’s exports slipped for an eighth month in July, dragged down by China-bound shipments of car parts and semiconductor production equipment, while manufacturers’ confidence turned negative for the first time since April 2013.


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