Economist Intelligence Unit ViewsWire | Aug 14th 2008
Japan’s GDP contracted in the second quarter of 2008, underlining the dampening effect that rising prices and weakening exports are having on the world’s second-largest economy. The prospects for the rest of this year and 2009 are equally poor, and the Economist Intelligence Unit expects full-year growth to slow sharply from the very healthy rate of 2.1% recorded in 2007 to less than 1% in 2008.
According to data released by the government’s Cabinet Office on August 13th, seasonally adjusted real GDP contracted by 0.6% quarter on quarter in the three months to June. As the new data also revise down first-quarter growth, from 1% to 0.8%, the economy’s performance in the second quarter looks especially weak. In annualised terms, GDP contracted by 2.4% in the quarter to June. Japanese national-accounts data are revised frequently, so the picture may change as further data releases come out later in the year. Given the problems facing the global economy, however, it seems unlikely that any such revisions will be substantially upwards.
The latest data, at any rate, are universally bleak. This reflects the increasing impact on Japan of the various headwinds from the global economy—including weakening demand in export markets, high oil and food prices, and the continuing fallout from the US sub-prime crisis. During the second quarter of 2008, almost every expenditure component of domestic demand contracted, the exception being government consumption, which rose by 0.1% quarter on quarter. Government consumption accounts for a substantial share of GDP, at around 18%. However, it is far less important than private consumption, which accounts for 57% of GDP and which contracted by a worrying 0.5% in the second quarter.
A variety of factors are dampening private consumption, including a weakening jobs market, sluggish wage growth, rising inflation and, more broadly, concerns about the domestic political situation. For instance, in June the ratio of active job openings to applicants fell to 0.91, meaning that there are now more applicants than there are jobs available, from 1.05 a year earlier. Even those who have jobs are finding that their wages do not stretch so far, encouraging them to be more cautious in their spending. Nominal wages at companies with 30 or more employees fell by 0.6% year on year in June, while headline consumer price inflation in the same month reached a ten-year high of 2%. The irony of the pick-up in inflation in Japan is that for much of the economy’s “lost decade” in the 1990s and early 2000s the country was wracked by deflation. The trouble now is that, by wide consensus, Japan is experiencing the “wrong” kind of inflation: that is, in the shape of commodity-driven cost-push inflation that discourages consumption, rather than demand-pull inflation that would reflect a pick-up in consumers’ willingness to spend.
Nor is the corporate sector looking much brighter. “Private non-residential investment”, which is essentially the Cabinet Office’s term for capital spending by companies, contracted by 0.2% quarter on quarter in the three months to June. The latest GDP data also revise down first-quarter investment to a 0.1% contraction, compared with a small gain of 0.2% previously. Capital investment by the corporate sector has played a key role in the Japanese economy’s revival since 2003, underlining among other things the success of corporate restructuring in recent years. However, companies now clearly face tougher times. The Bank of Japan’s latest quarterly Tankan survey, published on July 1st, showed business confidence among major manufacturers at its worst level since September 2003.
In part, the fact that companies are more pessimistic about their prospects reflects the above-mentioned weakness of domestic demand. The problem is being aggravated by rising prices for energy and inputs—in July the corporate-goods price index rose by 7.1% year on year, its highest rate of increase in 32 years. Firms remain largely unable to pass rising costs on to their customers, so margins are increasingly being squeezed.
At the same time, the outlook for corporate profits is clouded by the prospects for the export sector. The value of exports to the US, Japan’s largest overseas market, fell for the tenth consecutive month in June. Total exports fell by 1.7% year on year, the first decline in almost five years. Even growth in shipments to China—which recently has helped to offset the weakness in US demand for Japanese goods—has slowed. These trends in export values are reflected in the Cabinet Office’s latest national-accounts data, which are price-adjusted and therefore show export volumes. Exports of goods and services contracted by 2.3% in the second quarter, and first-quarter growth was also revised down to 3.4% (from 4% previously). The contribution to growth from net exports of goods and services—essentially exports minus imports—was zero in the second quarter. Net exports have been one of the key contributors to growth in the past few years, so the latest decline is a worrying development. One of many in a poor second-quarter GDP performance, in fact.