Japan GDP Surges 4%, Most In Two Years, On Jump In Government Stimulus Spending

Japan"s economy grew by 1% sequentially, and 4% on an annualized basis in Q2, smashing expectations of a 2.5% print and well above the upward revised 1.5% in the first quarter; it was also the the highest quarterly growth since a 5% print in Q2 2015, Japan"s Cabinet Office reported, and the 6th consecutive quarter of expansion for recently embattled Prime Minister Shinzo Abe, who has plunged in the polls following a series of corruption scandals.

The unexpectedly strong GDP print was driven by a 9.9% jump in private non-residential investment as well as an striking 21.9% annualized surge in public investment as some of the public works spending included in last year’s economic stimulus package starting to emerge; meanwhile exports declined.

On a sequential basis, GDP rose 1.0%, above the 0.6% expected, up from the 0.4% in Q1 and the highest print in just over two years.

Annualized private demand soared by 5.3%, or 1.3% higher compared to the first quarter, an impressive jump from the previous quarter’s rise of 0.2%. Private consumption rose 0.9% in Q2, more than double the 0.4% reported for the first quarter.  Aside from the clearly "one-time" surge in public investment, which in the second quarter exploded by an annualized 21.9% as some of the public works spending included in last year’s economic stimulus package have started to emerge, private non-residential investment climbed 2.4% from 0.9% in Q1, while government consumption grew 0.3%, bouncing from a 0.1% contraction in the prior quarter.

Finally, spoiling the otherwise pristine report was the unexpected drop in exports of goods and services which dropped 0.5% on a quarterly basis and -1.9% annualized, the lowest export number since Q2 of 2016. The plunge in net exports dragged Japan"s headline growth figure down 0.3% points.

Ahead of the number, Goldman"s Japan analyst Naohiko Baba said that "we estimate Apr-Jun real GDP growth of +2.4% qoq annualized, up from +1.0% in Jan-Mar. While we expect net exports to turn to a negative contributor, we think private-sector demand was strong for personal consumption and capex. We also expect double-digit growth for public capital formation, with some of the public works spending included in last year’s economic stimulus package starting to emerge. We think Apr-Jun GDP will show a clearer tilt toward domestic demand led growth. "

Separately, Barclays analysts said that "looking forward, we expect real GDP to rise an annualized 1.3% in Q3, 0.9% in Q4, and 1.0% in Q1 2018 on a q/q basis,” they wrote. “For Q3, we believe external demand will reverse to a positive contribution and anticipate a continued economic boost from last fiscal year’s second supplementary budget of 11 October 2016?.

Considering the absolute non-reaction in markets, where the USDJPY is up barely 20 pips in a delayed response to Japan"s "best" economic report in over two years, either nobody puts any credibility in this number, or just as likely, fundamental economic data no longer matters to any investing decisions.

Finally, as some commentators put it best on Twitter, "yen climbs on nuclear war. yen falls on strong GDP. good"

yen climbs on nuclear war. yen falls on strong GDP. good

— Lee Saks (@Lee_Saks) August 14, 2017

Japan GDP Rises 2.2%; Longest Growth Stretch In 11 Years

In the same quarter in which the US teetered on the verge of contraction (supposedly due to inclement weather despite not one but two seasonal adjustments meant to eliminate "residual seasonality"), Japan grew at the fastest pace in a year and nearly triple that of the US.

On Thursday morning, Japan"s Cabinet Office reported that Japan"s Q1 GDP rose at a 2.2% annualized pace, beating estimates of 1.7% growth, and up from the 1.2% SAAR growth in Q4 of 2016. It was also Japan"s 5th consecutive quarter of positive GDP, the longest stretch of growth going back 11 years. 

On a sequential basis, Japan"s economy grew by 0.5% in Q1, up from 0.3% in Q4, and in line with expectations (which begs a question, how did economists who predicted 0.5% sequential growth get 1.7% annualized, while the actual number was indeed 0.5%, yet when annualized resulted in 2.2%. The answer is probably in non-GAAP rounding).

Broken down by components, domestic demand rose 0.4% in Q4 compared to the previous quarter, when consumption posted a modest decline. Residential investment was the biggest growth component of private demand, rising by 0.7%, while public demand was a more modest 0.1%. Private inventories added 0.1%, while net exports rose 2.1% in the quarter, down modestly from 3.4%, due to the 5% increase in the Yen over the time period. Imports were a 0.2% offset to annualized GDP growth, after growing by 1.4% sequentially.

The number easily beat Goldman"s expectations. This is what the bank said ahead of the report: "We forecast +1.7% qoq annualized real GDP growth in Q1, accelerating from +1.2% in 2016Q4. Steady export growth, recovering consumer spending and inventory accumulation are the main contributors to Q1 growth, while we expect small correction to private capex, which advanced +8.4% qoq annualized in the prior quarter. Positive GDP growth in Q1 would mark a fifth quarter of sequential growth, for the first time in 11 years, confirming the solid state of Japanese economy."

Some other economist reactions via Bloomberg:

• "Exports have taken the lead in the recovery, and domestic demand wasn’t bad, showing resilience with household spending turning positive," said Masaki Kuwahara, senior economist at Nomura Securities Co., which correctly forecast the 2.2 percent expansion.


• "Looking ahead, the growth rate will slow a bit, if not turn negative, toward the second half of this year as China’s economic indicators are weakening a bit. I’m expecting exports to slow down, weighing on the overall growth rate,” said Kuwahara.


• "It’s a pretty impressive number but I don’t think this can continue for a while," said Takashi Shiono, an economist at Credit Suisse Group AG.


• "Uncertainties are increasing rapidly with the chaos at the White House and a pickup cycle in global production could end soon," said Shiono. "The risk-off sentiment in the market will put pressure on the yen to strengthen and that will weigh on Japan’s economy."

The strong GDP growth may come as disappointment for Japan bulls, however. Already the BOJ has quietly tapered its bond purchases from JPY80 trillion/year to JPY60 trillion, and Kuroda, with less than a year left on his tenure, will be looking for excuses to not only officially taper purchases - here he has no choice as the BOJ has about 1 year left of eligible bonds to monetize - but to potentially give the old rate hike experiment another try, even if the BOJ"s latest minute reluctantly admitted that despite labor shortages the economy has failed to generate the much needed inflation. Today"s strong GDP print just gave Kuroda the excuse he needs to hint at even more monetary tightening, assuming of course the the threat of US presidential impeachment has been postponed indefinitely.