While some may be cheering Japan’s latest 3.7% annualized GDP growth, the number was actually disappointing.
First of all, it missed consensus, which was expecting 3.9%. Asian markets fell across the board as a result.
Second of all, GDP was indeed up but all of this growth was caused by the GDP deflator. In nominal terms, Japanese GDP fell 0.7% sequentially, and 5.9% YoY as per Goldman Sachs.
Goldman Sachs Japan Economic Flash: The GDP breakdown by final demand component shows (1) a +5.1 pp growth contribution from external demand (net exports, which is exports minus imports; January-March – 6.0pp), assisted by weak imports, (2) acceleration to +36.3% qoq annualized for public fixed investment (January-March +10.9%), assisted by frontloading of public works, and (3) +3.1% for personal consumption (-4.6%), a surprisingly strong showing assisted by the effective subsidies for purchasing energy-saving electrical goods and environmentally-friendly autos.
While technically, Japan came out of recession, for all intents and purposes underlying demand remained very weak. As shown in the chart below from Econompic, Japan has yet to exit it’s nominal GDP recession. If you remove second quarter GDP one-offs such as the front-loading of public works programs and energy efficient auto subsidies, nominal GDP decline would have been even worse.
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