September 8, 2015, 13:30 JST

Weak Q2 GDP shows the limit of Abenomics

According to the 2nd Preliminary Estimates published by Cabinet Office, the Japanese economy shrunk by 0.3% in the April-June 2015 quarter in real terms. The result was slightly better than the -0.4% decline announced in the initial estimates, but hardly a good news for Japan.

A breakdown by components reveals that the weakness in the economic activities was broad-based in the April-June quarter. The quarterly growth in the private capital expenditure was downwardly revised to -0.9% from -0.1% as initially estimated. Private consumption growth was slightly revised up to -0.7% from -0.8% as initially estimated, but a negative growth nevertheless. With the decline in the April-June quarter, the level of the private consumption in real terms is now lower than in the summer of 2012, before Abenomics got rolling. Back in the summer of 2012, Nikkei was below 10,000, the unemployment rate was above 4%. Japanese consumers are not buying Abenomics any more.      

The component that led to the upward revision in the GDP growth was the inventory investment. The investment contributed by 0.3% point to the GDP growth, up from 0.1% point as initially estimated. However, the contribution from the inventory investment is tricky to interpret. An inventory could just be a left over goods that could not be sold. 

In our view, the negative growth in the quarter symbolizes the limit of Abenomics. Despite the sharp and sustained decline in yen, Japanese manufacturers continue to be reluctant to expand their production in Japan. Despite the rise in the stock market, sustained until the end of June this year, consumers were keeping their wallet shut. While we should not judge the effectiveness of a public policy by a mere quarterly performance, the poor performance in April-June adds to the mounting evidence that Abenomics is losing momentum and will not accomplish its intended goal.

For more details on our views on Japan, please see our recently published report "Abenomics nearing its expiry date"