Japan exceeds anticipations on strong exports, GDP increased

August 17, 2023: On Tuesday, Japan exceeds anticipations on strong exports, GDP increased.

Economists surveyed had expected the world’s third-largest economy to post 3.1% increase in the April-June quarter. The impressive gross domestic product data translated to a more modest quarterly expansion of 1.5%, topping expectations for 0.8% growth.

The benchmark Nikkei 225 index extended earnings narrowly to trade up nearly 1%. At the same time, the Japanese yen pared losses against the U.S. dollar, and Japanese state bonds across the various tenures were broadly unchanged.

Tuesday’s GDP print followed an annualized 2.7% growth in the first quarter, pointing to a continued post-Covid recovery for Japan’s economy. Still, the narrower gap between reality and expectation in every quarter growth tempers any longer-term optimism.

“Japan’s economy expanded at an extremely rapid pace last quarter, but we expect a renewed slowdown across the second half of the year,” Marcel Thieliant, head of Asia-Pacific at Capital Economics, wrote in a note.

“However, the report’s details weren’t as impressive as the headline,” he added. “Instead, nearly all the output growth was driven by a 1.8%-pts boost from net trade. That marked the second-largest contribution from net trade in the 28-year history of the current GDP series, with only the bounce back in exports from the first lockdown at the beginning of the pandemic providing a larger boost.”

Exports rebounded 3.2% from the previous quarter, primarily driven by the car shipment spike, while imports plunged 4.3%.

Other details beyond the rosy headline GDP growth figure suggest the Bank of Japan is likely to revert from its ultra-easy monetary posture.

A surprise 0.5% annualized drop in private consumption expenditure and flat capital expenditure point to muted domestic demand despite the first employee compensation sequential increase in seven quarters.

Inflation has surpassed the BOJ’s 2% target for 15 consecutive months. In July, the Japanese central bank loosened its yield curve control over the 10-year Japanese government bond, intending to make its ultra-easy monetary position more sustainable.