Japanese 2Q GDP Dissected: Bad All Over

August 13, 2008

Real GDP plunged 2.4% at a seasonally adjusted annual rate (saar) last quarter, the largest decline since 3Q01, when the 9-11 attacks occurred.  Although such followed a solid 3.2% increase in the first quarter, the occurrence  of negative growth should not be dismissed as an offset to earlier strength.  Economic growth in 1Q08 and 4Q07 were each revised downward, and on-year GDP expansion of 1.0% was the smallest y/y increase since 4Q04.  Moreover, all components of demand did poorly last quarter.  Private consumption fell 1.9% saar, weakest since 3Q06.  Residential and non-residential investment fell by 13.0% saar and by 0.9% saar.  Government spending dropped 3.0% saar.  Exports (-8.9% saar0 and imports (-10.7%) lost ground, too.  In comparisons with 2Q07, housing plunged 15.6%, and both imports and government expenditures were also in the red.  On-year export growth of 6.4% was the lowest since 2Q05, and the 4-quarter 0.6% rise in private consumption was the worst since 1Q05.  Nothing is working right in Japan.  Workers failed to share in the profits bonanza of recent years.  Households and firms are now being severely squeezed by higher energy costs.  Japan suffers disproportionately because it is more reliant than other economies on imports to get its energy. The GDP price deflator decreased 1.6% in the year to 1Q, and nominal GDP fell 2.7% saar last quarter. Those were the weakest reading since 1Q03 and 4Q05, respectively.

The long economic expansion from 2002 was fed by global demand, which is now shrinking rapidly.  In a balance of payments report released by the Ministry of Finance today, exports fell 1.5% on-year in June, compared to positive year-over-year growth of 4.4% in 1H08, 10.2% in 2H07 and 12.5% in 1H07.  Imports, by contrast, soared 17.8% y/y in June and rose 11.6% in 1H08.  Policy options are limited.  Japanese interest rates are too low for the Bank of Japan to consider cutting them except perhaps in a deflationary crisis, but corporate goods prices rose 7.1% in the year to July.  Japan has enormous foreign debt and a significant remaining budget deficit as legacies of the very expansive fiscal policy pursued in the 1990’s.  The reshuffled Fukuda cabinet hopes to finalize a fiscal stimulus by the end of this month, but such will be a shadow of the massive, and largely ineffective, undertakings of the last decade.  Against the backdrop of weaker growth in most elements of the global economy, foreign officials will be sensitive to exploitive beggar-thy-neighbor yen management by Tokyo authorities.  With industrial production down 2.2% in in June and likely to drop in July and August as well, consumer confidence at a 26-year low, employment off 0.6% y/y, manufacturing output according to the PMI at the softest reading since the start of 2002, and housing starts worsening again, another negative quarter is highly probable in 3Q08 and quite plausible in 4Q08.



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