World Economy

Japan Q2 GDP blows past expectations on robust domestic demand

Key Points
  • Q2 GDP expands annualized 4.0 percent versus forecast of 2.5 percent growth
  • Q1 GDP rises 1.0 percent quarter-over-quarter, government data shows
  • Consumption up 0.9 percent Q1 versus forecast of 0.5 percent growth
  • Capex rises 2.4 percent Q1 versus forecast of 1.2 percent growth

Japan's economy grew in the second quarter at the fastest pace in more than two years as consumer spending and capital expenditure both rose at the fastest in more than three years, highlighting stronger domestic demand.

Gross domestic product expanded an annualized 4.0 percent in April-June, government data showed, more than the median estimate for 2.5 percent annualized growth and the biggest
increase since January-March 2015.

Hiroshi Higuchi | Getty Images

Compared to the previous quarter, the economy expanded 1.0 percent, versus the median estimate for 0.6 percent growth.

Annualized GDP for previous quarter was revised to a 1.5 percent increase, while quarterly real (inflation adjusted) GDP was revised up to 0.4 percent growth from a 0.3 percent increase.

Economic growth is expected to continue in coming quarters, offering the Bank of Japan (BOJ) the hope that a tight labor market is finally starting to boost consumer spending, which in turn makes it easier to generate sustained inflation.

The economy grew for six straight quarters in April-June. The last time the economy had a run of six consecutive quarters of growth was January-March 2005 through April-June 2006.

Private consumption, which accounts for about two-thirds of GDP, rose 0.9 percent from the previous quarter, more than the median estimate of 0.5 percent growth.

That marked the fastest expansion in more than three years as shoppers splashed out on durable goods, an encouraging sign that consumer spending is no longer the weak spot in Japan's economic outlook.

Capital expenditure jumped by 2.4 percent in April-June from the previous quarter, versus the median estimate for a 1.2 percent increase. That was the fastest growth in business investment since January-March 2014.

External demand subtracted 0.3 percentage point from GDP growth in April-June in part due to an increase in imports. This is notable because Japan usually relies on exports to drive growth.

Since launching quantitative easing in April 2013, the BOJ has pushed back the timing for reaching its 2 percent inflation target six times in part due to weak consumer spending.

The GDP data for April-June show private consumption is finally starting to move in the direction that the BOJ and other government ministers have long predicted.