Andrew Rose, Fund Manager, Japanese Equities:
Japan’s second quarter real GDP fell a bracing 6.8% compared to the previous quarter on an annualised basis. At the same time the previous quarter’s growth rate was revised down from 6.7% to 6.1% yielding the obvious conclusion that the economy shrunk during the first half of 2014.
Whilst undeniably weak (and significantly worse than the quarter immediately following the last consumption tax increase in 1997 – although the degree of front-loaded demand was also lower at that time) the rate of decline was slightly ahead of consensus expectations. Central to the decline was the “payback” from the front-loaded demand that occurred during the first quarter of this year to beat the 3% increase in the consumption tax on April 1st. Not surprisingly, therefore, the weakest areas were private demand components of GDP such as private consumption and housing investment,( i.e. where sensitivity to the tax increase was highest).
The GDP release came out just before the Japanese stockmarket opened this morning. Given that expectations were for a weak number, the release had little impact on the market, which rose slightly, although the yen weakened modestly. The market’s attention is already on the shape of the rebound in GDP this quarter. Whilst the dislocations caused by the tax increase render it difficult to gauge the underlying strength of the economy, it seems reasonable to expect growth to resume in the third quarter. Some of the data surrounding consumption post the end June cut-off for second quarter GDP is more encouraging, survey data surrounding private capital spending is indicative of a rebound and exports are finally showing some signs of responding to the currency’s weakness over the last 18 months.
Keith Wade, Chief Economist and Strategist
I am wary on the outlook for Japan as - exports and investment aside - consumer spending is likely to disappoint. The increase in consumption tax has pushed up inflation, but as wages continue to lag we are seeing a fall in real household income in Japan. Weaker consumer spending is likely to be the result, so tempering the recovery. We look for the Bank of Japan to reappraise its more bullish view of the economy in coming months and to step up quantitative and qualitative easing (QQE).