Japan's GDP: Weak Q1 Stimulates Solid Q2; But Don’t Be Fooled, GDP Is Not Strong

The chart adequately depicts the economic condition in Japan. Japan’s quarterly GDP jumped to a gain of 3.1% in Q2 2024, but that was from the Q1 decline rate of -2.3%. Together there is marginal growth in the first half of the year.

Japan’s year-on-year growth rate shows the impact of these quarterly gyrations as the 3.1% annualized Q1 gain was not enough to boost year-on-year GDP growth to positive territory. Japan’s GDP continues on a declining year-over-year path.

Growth trends Japan’s quarter GDP series became exceptionally bumpy in and nearly trendless from 2021 on in the wake of the Covid disruption. GDP growth was positive with quarterly growth rates spiking as high as 4% and 5% but after Q1 2003 quarterly growth lost its zest; two of the past five quarterly growth rates have been negative. One has been about one quarter of one percentage point, with two other quarters in the 2.5% to 3% growth range. This pattern has produced a decaying year-on-year GDP growth rate pattern.

Quarterly growth Japan’s second quarter of 2004 produced a sharp reversal of weak private spending that fell 2.2% (annualized) in Q1 then rebounded at a 4% annual rate in Q2. However, there also has been four straight quarters of real private spending declines through Q1 2024. Public spending stepped back to gain just 0.3% annualized in Q2 after growing by 1.1% in Q1.

Spending on capital formation has been erratic. It fell at a 3.5% pace in Q1 then surged back at a 6.9% growth rate in Q2. However, recently in Q1 2023, the quarterly capital spending has been as strong as 9.0%. Still, in three of the last six quarters, there have been declines. Plant and equipment spending has evolved similarly. Housing spending rose at a sharp 6.7% annual rate in Q2 following a 10.1% annual rate drop in Q1 that was part of an ongoing three-quarter decline.

On the trade front, the balance of trade has been through some substantial gyrations, including two surpluses in the last six quarters. Exports rose by a solid 5.9% annualized in Q2 but only after a drop in Q1 at a 17.2% pace. Similarly imports rose at a pace of 7.1% compared to a Q1 drop at a 9.6% annual rate.

Domestic demand rose at a 3.5% annual rate in Q2 snapping a four-quarter declining streak.

Annual trends Year-on-year GDP growth has been fairly steadily slowing and has posted declines in each of the last two quarters. Private spending has been negative for four quarters running, but the weakness was trimmed in Q2. Public consumption rose year-on-year in Q2, and that was the first net gain in six quarters.

Gross fixed capital formation has been slow and slowing. Plant and equipment spending has been erratic around small gains and losses year-on-year. Housing spending has contracted year-on-year for the last three quarters.

The annual GDP net exports result has been a positive balance in four of the last five quarters but in Q2 that four-quarter change has turned negative. Exports have logged low positive growth until this quarter when the year-on-year growth rate posted at -0.2%. Imports have been declining over the previous four quarters but logged growth of 2.5% in Q2 2024 to break that string.

Domestic demand has been shrinking year-on-year for four quarters in a row. The tendency, however, has diminished; it produced a small 0.1% contraction in Q2.

Summing up On balance, Japan’s growth remains weak. The quarterly number for Q2 is a bit of an optical illusion when put in context and even if it is just compared to Q2. The trend for Japan’s GDP is weak. Inflation remains mixed but is closer to target. Monetary policy is grappling with its desire to get rates back to normal, up, and away from the zero bound. But monetary policy will not be able to be normalized unless GDP strengthens. And Japan is still running against the tide of shrinking demographics. Policy in Japan still has a lot to sort out.