Japan’s real GDP growth revised up in Q2

Chris Scicluna

Wall Street softer as bonds extend post-payrolls sell-off; Japan equity rally continues, but most other bourses in the Asia/Pacific region weaker today
Returning from the Labour Day holiday, the US bond market continued its post-payrolls sell-off yesterday with the 10Y UST yield closing the session up 5bps at 1.37% – the highest close since 13 July. So, on a day devoid of US economic data, the S&P500 retreated from last week’s record level with a modest 0.3% decline, while the DJI fell 0.8%. However, with technology stocks continuing to advance, the Nasdaq nudged up 0.1% to set a new record high. The lift in bond yields proved supportive for the greenback, with gains made against all key counterparts.

Against that background, it has mostly been slightly softer today in the major Asian equity markets, with losses spanning from a little less than ½% in Mainland China to around 1% in Taiwan, Singapore and South Korea. The notable exception has been Japan, where the TOPIX has advanced 0.8%, thus extending its winning run to eight sessions (including a 5% lift over just the previous three sessions). A slightly larger than expected upward revision to GDP growth in Q2 helped bolster sentiment, even as the contraction in Q1 was deemed deeper than estimated previously and the Economy Watchers survey warning of a sharp deterioration in business conditions in August (further detail below). Meanwhile, Fumio Kishida – one of the frontrunners to replace PM Suga – again talked of providing new fiscal support for the economy, saying that he would spend “tens of trillions” of yen in new stimulus, including money for disaster prevention. He also said he would set up a panel on “new Japanese-style capitalism”, rethink the taxation of investment income and continue with “bold” monetary policy to defeat deflation.

A quiet day for news in the Antipodes saw both Aussie and Kiwi bond yields move higher, while their respective equity markets weakened somewhat. Tracking the lift in UST yields, the 10Y AGCB yield increased 4bps to 1.30%, thus more than erasing the modest decline that followed yesterday’s RBA Board meeting, even as new virus cases in New South Wales rebounded to 1,480 (a further 221 cases were reported in Victoria).

Japan’s real GDP growth revised up to 0.5%Q/Q in Q2, but Q1 contraction now larger and nominal economy 0.3% smaller than estimated previously
Today the Cabinet Office released the revised national accounts for Q2, which amongst other things incorporated new data on capex and inventories from last week’s MoF survey of corporations and improved data from the public sector. The good news is that growth in real GDP was revised up 0.2ppt to 0.5%Q/Q (1.9%AR), which was 0.1ppt firmer than the consensus expectation. That news was tempered somewhat by a 0.2ppt downward revision to Q1, which thus now reports a contraction of 1.1%Q/Q. Cumulative revisions over the past year were still sufficient to see annual real GDP growth revised up 0.1ppt to 7.6%Y/Y – of course flattered by base effects associated with last year’s slump in activity. While real GDP was just 1.4% below the pre-pandemic level in Q419, it was still 3.3% below the peak in Q319 ahead of the consumption tax hike. And downward revisions to the GDP deflator meant that the level of nominal GDP in Q2 was 0.3% lower than reported previously and still more than 2% lower than in Q419 and similarly 3.3% below the peak in Q319.

Turning to the real expenditure detail, the largest contribution to the upward revision to GDP growth in Q2 came from public consumption, which is now estimated to have grown 1.3%Q/Q – 0.8ppt more than reported previously. As had seemed likely given the positive surprise in the MoF’s survey, growth in non-residential investment was also revised up 0.6ppt to 2.3%Q/Q, thus now contributing 0.4ppt to the overall lift in output during the quarter. The first published breakdown of the capex data reported a steep 5.0%Q/Q increase in investment in intellectual property, lifting annual growth into positive territory at 1.1%Y/Y. Investment in transport machinery fell 6.1%Q/Q but was still up 5.0%Y/Y, while investment in non-transport machinery increased 2.8%Q/Q and 9.4%Y/Y. Non-residential building activity declined 0.6%Q/Q and so was down 2.9%Y/Y. Growth in private consumption was revised up 0.1ppt to 0.9%Q/Q, but this follows a 0.3ppt downward revision to growth in Q1 which now stands at -1.3%Q/Q. Growth in residential investment was unrevised at 2.1%Q/Q and the negative contribution to growth from next exports was unrevised at 0.3ppt. Private inventories also subtracted 0.3ppt from growth in Q2, which was 0.1ppt more than estimated previously.

Also of note, following today’s revisions the GDP deflator points to an even weaker inflation pulse than in the preliminary report. This was driven by a revision to the private consumption deflator in light of the recent base year change made to the CPI. The deflator now reports a decline of 0.8%Q/Q – compared with 0.3%Q/Q previously – leaving prices down 1.0%Y/Y. Increased materials prices – as reflected in the PPIs – likely explains a slightly upwardly-revised 1.9%Q/Q increase in the residential investment deflator and a 0.6%Q/Q increase in the business investment deflator. Following these revisions, the overall domestic demand deflator declined 0.2%Q/Q and so was up just 0.2%Y/Y, while the overall nominal GDP deflator – not impacted by sharply higher import prices – fell 0.6%Q/Q and 1.1%Y/Y. As a result, despite the upward revision to real GDP growth, nominal GDP is now estimated to have declined 0.1%Q/Q in Q2 compared with the 0.1%Q/Q increase that had been reported previously.

Japan’s Economy Watchers survey points to sharply weaker business conditions in August
On a less positive note, today the Cabinet Office also released the Economy Watchers Survey for August, providing a more timely indication of economic activity. With a large part of the country re-entering full state-of-emergency conditions during the month in response to record virus cases, sadly the survey pointed to a marked deterioration in business conditions that was far larger than analysts had expected. In particular, the headline current conditions DI slumped 13.7pts to a seven-month low of 34.7 – about 10pts below the long-term average for this series. Perhaps some minor comfort can be found in the overall expectations DI, which declined a smaller 4.7pts to a four-month low of 43.4 – an outcome that suggests that respondents expect conditions to be slightly less dire over the coming 2-3 months.

In the detail, not surprisingly, the largest driver of the deterioration in current conditions was a much more downbeat account from those respondents interacting with the household sector. The survey’s household sector index fell 15.9pts to a seven-month low of 31.3, with the food sector index plunging 19.3pts to a three-month low of 21.1 and the services sector down a similar 19.1pts to a seven-month low of 29.2. The corporate sector index declined a smaller 8.8pts to 40.6, although this also amounts to a seven-month low. The manufacturing index fell 8.5pts to 44.3, whereas the non-manufacturing index fell 9.3pts to just 37.4. Looking ahead, for each sector the outlook index anticipates some improvement in current conditions over the coming 2-3 months, but in most cases to levels that remain weaker than the conditions that prevailed in July.

Japan’s bank lending growth continues to slow as demand for credit remains weak
Turning to the rest of today’s Japanese news, the BoJ reported that total bank lending increased just 0.6%Y/Y in August – the slowest pace since June 2012. Of course, this mostly reflects base effects associated with last year’s scramble to access bank liquidity, which had driven annual growth to a peak of 6.7%Y/Y in August last year. That said, the current demand for credit remains weak with a 0.2%M/M decline in lending in August marking the fourth modest decline recorded in the last five months. Lending at the major city banks – which had been the key suppliers of liquidity to corporates last year – declined a further 0.6%M/M and so was down 1.6%Y/Y. Lending at regional banks grew just 0.1%M/M and so annual growth slowed to 2.0%Y/Y. On the other side of the ledger, bank deposits declined fractionally in August for a second consecutive month. So annual growth has now slowed to 5.1%Y/Y, having earlier peaked at 10%Y/Y as households elected to bank rather than spend last year’s government support payments. Meanwhile, given the ongoing support provided by banks and the government to the corporate sector, just 466 bankruptcies were recorded in August – down slightly from July and 30.1% lower than a year earlier despite the pandemic.

Finally, balance of payments data revealed an adjusted current account surplus of ¥1.41trn in July, down from ¥1.78trn in June and a little below the average level in recent years. This narrowing – which was unexpected by the market – owed to downward surprises to the services and income balances, whereas the surplus on merchandise trade increased slightly.

French trade and Italian retail data due in the euro area; BoE’s Bailey to discuss monetary policy
Ahead of tomorrow’s ECB policy announcement, today will be a low-key day in the euro area. Data-wise, the French merchandise trade report for July is due along with Italian retail sales figures for the same month. More interesting perhaps, in the UK, BoE Governor Bailey and MPC members Broadbent, Ramsden and Tenreyro are due to testify before the Treasury Select Committee on the August Monetary Policy Report. Look out for any initial suggestions of how the MPC might assess the impact of yesterday’s major fiscal policy announcement – a big increase in personal taxation from next April to fund extra public spending on health and social care – on the economic outlook.

JOLTS and consumer credit data ahead in the US, together with the latest Beige Book and a speech by the New York Fed’s Williams
Another relatively quiet day looms ahead in the US. On the data front, Daiwa America’s Mike Moran expects the JOLTS report to point to a modest decline in job vacancies from the previous month’s record high in light of the more than 1mn new jobs created during that month. He also anticipates a $25bn lift in consumer credit during July, which would be below the previous two months but still slightly above the average seen earlier in the year. The Fed will release its latest Beige Book of economic anecdotes today while further information on how the Fed is viewing the economy will come from a speech on the economic outlook by the New York Fed’s Williams.

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