A better-than-expected GDP report for the second quarter extends Japan’s longest winning streak in a decade but it does not mean that the BoJ is ready to join other major central banks in dialing back accommodation.
Japan’s economy expanded at an annualized pace of 4.0 percent in the second quarter, and in so doing it extended the number of consecutive quarterly expansions to six – the longest winning streak in more than a decade.
In 2016, when the current winning streak began, the Japanese expansion was largely driven by a heavy reliance on trade. Domestic demand was soft and an inventory drawdown weighed on GDP growth, which left many market-watchers wondering whether the world’s third-largest economy could export its way back to prosperity.
Domestic demand picked up substantially in the second quarter as growth was driven by consumer spending as well as business fixed investment spending, both of which posted their largest quarterly increases in years and together boosted the headline GDP growth rate by 4.8 percentage points. A slower pace of drawdown in inventory investment also helped with a small 0.2 percentage point boost to overall growth. Were it not for a 1.3 percentage point drag from net exports, top-line GDP growth might have had a 5-handle.
Going into today’s report, our full-year 2017 forecast for GDP growth in Japan was 1.2 percent. This better-than-expected outturn for the second quarter suggests upside risk and will likely prompt us to revise that forecast higher at our next scheduled forecast update in September.
Any Implications for the Bank of Japan?
The Bank of Japan (BoJ) is not quite in synch with world’s major foreign central banks at present. The Fed is in a rate tightening cycle, the Bank of Canada raised rates in July with another hike expected this year. The European Central Bank is widely expected to announce plans to dial back its asset purchase program, and the Monetary Policy Committee at the Bank of England has been divided in recent meetings over whether and when to raise rates in the United Kingdom. Despite this backdrop, which can be collectively described as "less accommodative," the Bank of Japan has not budged in terms of it intended course.
At its July meeting, the BoJ made no change to that stance and even lowered its inflation forecast. The June CPI numbers for Japan were unchanged at 0.4 percent while core CPI showed no change over the past year. The August CPI figures will print between now and the September 20-21 meeting of the BoJ, but the Tokyo-CPI report for August, which tends to lead country-wide prices already, came in at just 0.1 percent, year over year. With inflation still well-below target, we do not expect the BoJ to signal any substantive change in its comprehensive package of monetary policy accommodation.