Japan Revises Q2 GDP Growth Up to 1.4% Annualized

Japan’s economy grew a little faster in the second quarter than the government first estimated, with real gross domestic product rising 0.4% from the previous quarter and 1.4% at an annualized rate. The Cabinet Office had initially reported growth of 0.3% quarter over quarter and 1.1% annualized for the April-June period.

The second preliminary estimate, released September 8 by the Economic and Social Research Institute of Japan’s Cabinet Office, also raised nominal GDP growth to 1.3% from the previous quarter, or 5.5% annualized. The first estimate had put nominal growth at 1.2% quarter over quarter and 4.8% annualized. The updated release incorporates additional source statistics and revised estimates that were not available for the August 17 first reading.

Business investment decline was revised smaller

The clearest improvement came from private non-residential investment. Real business investment fell 0.9% from the first quarter, a smaller decline than the 1.2% drop estimated in August. The Cabinet Office said the revision reflected, among other inputs, the replacement of a provisional demand-side estimate with figures based on the Ministry of Finance’s quarterly corporate enterprise statistics and combining those figures with supply-side estimates.

That change helped lift the contribution from domestic demand to real GDP growth to negative 0.1 percentage point from negative 0.2 point in the first estimate. Private demand as a whole contributed 0.1 point, revised from essentially zero. Private final consumption was reported at 0.0%, compared with -0.0% in the first estimate, so the published one-decimal figures still show essentially no change. Private residential investment fell 0.6%, revised down from a 0.5% decline.

Inventories provided a sizable offset within the private sector. Changes in private inventories contributed 0.3 percentage point to quarterly GDP growth, the same contribution reported in the first estimate. The Cabinet Office’s revision notes show that the second estimate replaced model-based estimates for some raw-material and work-in-progress inventories with information from the quarterly corporate survey and other source data. This is one reason second preliminary GDP estimates can change the composition of growth even when the headline revision is modest.

Public demand was also mixed. Government final consumption rose 1.7% in real terms, slightly stronger than the 1.6% first estimate. Public investment, by contrast, fell 0.5%, a larger decline than the 0.1% initially reported after June construction statistics were incorporated. Changes in public inventories subtracted 0.5 percentage point from growth, unchanged from the first estimate. The mix leaves the domestic side of the economy uneven rather than uniformly stronger.

Net exports supplied most of quarterly growth

External demand remained the dominant support for the headline GDP figure. Net exports of goods and services contributed 0.5 percentage point to real growth, unchanged from the August estimate. Because domestic demand subtracted 0.1 point, the 0.5-point contribution from net exports was enough to produce the overall 0.4% increase in real GDP.

The details of trade were revised in both directions. Real exports of goods and services increased 0.4% from the first quarter, slightly below the 0.5% gain initially reported. Imports fell 1.7%, compared with the earlier estimate of a 1.5% decline. Since imports are subtracted in the expenditure calculation of GDP, a larger import decline supports measured net exports. The Cabinet Office said upward revisions to export and import deflators were behind the changes in the real trade figures, while the overall contribution from net exports stayed at 0.5 point.

The price side of the national accounts was revised somewhat higher as well. The GDP deflator increased 1.0% from the previous quarter on a seasonally adjusted basis, compared with 0.9% in the first estimate. From a year earlier, the deflator was up 2.6%, unchanged from the initial reading. The gap between nominal GDP growth of 1.3% and real growth of 0.4% shows that price changes continued to account for a meaningful share of the increase in current-yen output during the quarter.

Compensation of employees was another area where the updated data were firmer. Nominal employee compensation rose 2.1% from the previous quarter, revised from 2.0%. The Cabinet Office’s two reference measures of real compensation increased 1.0% and 1.1%, up from 0.8% and 0.9% in the first estimate. On a year-over-year basis, nominal compensation increased 5.3%, while the two real measures rose 2.5% and 2.6%. Those income figures provide a stronger backdrop than the flat quarterly consumption reading, but they do not by themselves establish that household spending will accelerate.

The revision arrives ahead of the Bank of Japan’s September meeting

The revised GDP figures arrive shortly before the Bank of Japan’s September 17-18 monetary policy meeting. At its July 31 meeting, the central bank kept its guideline for the uncollateralized overnight call rate at around 1.0% in an 8-1 vote. One Policy Board member, Hajime Takata, favored raising the rate to around 1.25%.

In June, the Bank had raised the overnight call-rate guideline to around 1.0% and said it would continue to raise the policy rate and adjust monetary accommodation in response to developments in economic activity, prices and financial conditions. The second-quarter GDP revision gives policymakers a somewhat firmer reading on aggregate output than they had in August, but the composition is less clear-cut. Domestic demand still made a negative contribution, consumer spending was flat and business investment still contracted even after its upward revision.

The composition tempers what the 1.4% annualized headline says about underlying demand. Most of the quarter’s measured real growth came from net exports rather than broad domestic expansion. The September 8 release therefore strengthens the headline growth picture without erasing the softer readings underneath it. For monetary policy, GDP is only one part of a wider set of information that also includes inflation, wages, financial conditions and the outlook for external risks.

Japan’s next scheduled national-accounts update will cover the July-September quarter. The Cabinet Office plans to release its first preliminary estimate for third-quarter GDP on November 16 at 8:50 a.m. Japan time, followed by the second preliminary estimate on December 8. Those figures will show whether the stronger second-quarter headline carried into the second half of the year and whether domestic demand became a larger source of growth.