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Trader, analyst and instructor with a 6-year experience

Some thoughts on Japanese GDP

   By Kira Iukhtenko, FBS

Japan's economy contracted by 6.8% y/y and 1.7% q/q in Q2 following the much debated tax hike in April. The figure was not as bad as the economists expected, but it was the sharpest decline since the year 2011, when a powerful earthquake paralyzed the country. In Q1 Japanese GDP rose by 6.1% y/y and 1.6% q/q.  

Source: tradingeconomics.com

The April-May-June GDP was hit by a sharp drop in consumer spending – the indicator plummeted by 18.7% y/y. After fussy purchases of durable goods in Q1 Japanese households reduced consumption to the lowest historical level (since 1994). Economic slowdown after the sales tax hike was not unexpected, though. There are now two major questions on the table: will the negative effect be long-lasting and will it push the BOJ to launch additional easing?

Many specialists expect the economy to return to positive growth already in Q3 2014. For example, economists at the Japanese Dai-Ichi Life Research Institute forecast a 3% y/y growth in Q3. Analysts at Danske Bank agree: in their view, Q2 contraction is due to temporarily factors as “a lot of private consumption was frontloaded ahead of the tax rise”.

The USD/JPY pair jumped to 102.50 on the news, but, given the scale of economic slowdown, the reaction is muted. We link it to the low market expectations of additional policy easing. The regulator will clearly wait for Q3 data to appraise the economic consequences. Additional monetary injections will be launched only if the economic growth stays negative for a prolonged time period.

By the way, traders have to keep in mind that this is not the last tax increase in Japan. A further hike from the current 8% to 10% is scheduled for October 2015. It will likely be a long and winding road to economic stability in Japan. 

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