According to preliminary government statistics issued on Tuesday, Japan’s economy proved resilient by reaching its third straight quarterly expansion, with strong export growth helping to notable annualized 6% gain in the second quarter. The outstanding gross domestic product (GDP) statistics exceeded market forecasts, as 3.1% growth was expected by experts polled by Reuters for the April–June quarter.

A more modest quarterly expansion of 1.5%, which outperformed the predicted 0.8% increase, was the result of the strong GDP statistics. As a result, the Japanese yen pared back its losses against the US dollar, and the benchmark Nikkei 225 index extended its gains by about 1%. Japanese government bonds maintained their stability throughout a range of maturities.

This most recent GDP reading comes after an annualized gain of 2.7% in the first quarter, showing that Japan’s economy is on a sustained recovery trajectory after the COVID-19 pandemic’s economic disruptions. Long-term optimism is, however, muted by the narrower discrepancy between actual growth and market forecasts for the quarter-over-quarter expansion.

The second half of the year is expected to see a downturn in Japan’s economy, according to Marcel Thieliant, Head of Asia-Pacific at Capital Economics, despite the country’s GDP expanding quickly in the most recent quarter. Thieliant pointed out that the GDP growth’s great headline was hiding less spectacular facts. He emphasized that a boost of 1.8% from net trade was responsible for a significant chunk of the production gain. The recovery in exports during the early stages of the epidemic provided the only greater boost, making this the second-largest contribution from net trade in the 28-year history of the current GDP series.

The excellent GDP performance was mostly due to the recovery in exports, which was driven principally by a 3.2% increase in auto shipments, and a 4.3% decrease in imports.

The bigger picture, however, goes beyond the headline. The BOJ may want to reconsider changing from its ultra-accommodative monetary policy in light of the GDP growth. Despite the first sequential gain in employee pay in seven quarters, the 0.5% annualized decline in private consumer expenditure and stagnant capital spending highlight the weak domestic demand.

Additionally, this economic performance is taking place at a time of consistently high inflation, which has been higher than the BOJ’s objective of 2% for 15 straight months. In an attempt to make its ultra-accommodative monetary policy more sustainable, the Japanese central bank modified its yield curve control over the 10-year Japanese government bond in July.


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