Skepticism Greets Announcement Of Japan's 2nd Quarter GDP

As generally expected, Japan's GDP rose in the second quarter, but the 3.7% annual rate of increase was below the 4-4.5% consensus estimate and failed to impress the financial markets. Japan's Nikkei 225 stock price index greeted the rise with a resounding drop of 3.10%, its worst one day drop since March 30.

The quarter to quarter rise of 0.9% was accounted for by an increases in net exports of 1.6 percentage points and in private consumption of 0.5 percentage points. These positives were offset by a 0.6 point decline in gross fixed capital formation, a 0.5 point decline in private inventories and a 0.1 pt decline in government consumption. Except for the contribution of government consumption, the contributions of the four other activities are shown in the first chart.

In spite of government's stimulus programs, the rise in private consumption has not been large enough to offset the declines in business investment. As a result, domestic demand, especially private domestic demand, is still declining, casting doubts concerning the sustainability of the upturn. Private and public contributions to growth in domestic demand are shown in the second chart. Perhaps another concern is the GDP deflator. Although the year over year change is still positive, it was smaller than those of the previous two quarters. The specter of deflation still hovers over the outlook.