August 13, 2014, 18.00 JST

The weak Q2 GDP and its consequences

 Source: Cabinet Office, JMA.

The growth in Japan is undershooting the prior expectation

The latest GDP data was weak, showing that Japan shrunk by as much as 1.7% in April-June quarter. The 5.0% decline in the private consumption was the key downer, but other sectors such as residential investments, corporate capital spending also registered sizable declines. Even exports were down by 0.4% in the quarter. What are the consequences of the weak Q2 GDP result? 

The official growth outlook needs to be cut down

With the fresh data in, the Japanese government officials including the BoJ needs to cut down their 2014 growth outlook. The BoJ and the government have been cutting down its growth forecast since the beginning of the year. In January this year, the BoJ forecast the GDP growth for the fiscal year 2014 to be 1.4%. 6 months after in this July, it has revised it down to 1.0%. With the weak Q2 results, it will probably need to revise it down again to sub-1% and so does the Japanese government that has a slightly optimistic forecast of 1.2% for the fiscal year 2014. In order for Japan to grow by 1.2% in the fiscal year 2014, Japan needs to grow at the pace of 5% in the next three quarters, a highly unlikely performance without extraordinary policy intervention. 

Weak growth unlikely to prompt the BoJ to take actions 

Will the weaker growth outlook prompt the BoJ or the government to take stimulus measures? The answer to this question is most likely a no. Inside the BoJ, the initial Korodanomics momentum seems to be giving way to more cautious traditional BoJ view. The BoJ seems no longer intent on pursuing the "2% inflation within 2 years" goal. In the traditional BoJ view, 1% growth with 1% inflation is adequate and thus the BoJ seems not so troubled by the weaker growth outlook. 

Weak growth unlikely to prompt the government to take actions either 

If the BoJ is not taking actions, how about the government? Prime Minister Abe is not giving up his 2% growth target and he could have suggested a need of a stimulus after seeing the weak Q2 results if not for the following constraint. In the current circumstance, the government cannot voice a need for a stimulus because if it did, the first thing the government would need to consider is the cancellation of the sales tax hike in 2015. But since the cancellation would lead to a political upheaval, the Abe government is likely to maintain an optimistic view on the economy, even if they are in fact starting to be concerned for the sustainability of economic growth. 

So where does it leave the future of Abenomics?

For the reason stated above, policy makers are likely to sit on the sideline even if the economy starts to show further signs of weakness. In our view, the risk is that the Japanese economy may be entering a few quarters of weak growth. With a large decline in consumers' purchasing power due to inflation, the hope for the Japanese economy is on corporate capital spending and exports. At this moment, neither of them seems to be sufficiently robust enough to lead the growth though. While the July-September quarter is likely to register a positive growth on the back of a rebound from poor April-June, we fail to see what could drive the growth in Japan from October-December onward. It seems Japan is likely to enter 2015 on a weak growth momentum.