MNI INSIGHT: Q2 Japan GDP In Line BOJ View; Post-Tax Hike Key

By Hiroshi Inoue

     TOKYO (MNI) - Japan's growth slowed in Q2 from the previous quarter, but

the data supported the Bank of Japan view that domestic demand has boosted the

economy as exports slow, MNI understands.

     The BOJ will look for signs of a boost in the export sector, although it is

less certain of a quick recovery as trade tensions linger, weighing on the

global economy, but hopes domestic demand will continue to be a driver in Q3

ahead of the October 1 consumption tax hike.

     With data likely to be mixed at best over coming months, the BOJ board will

face considerable challenges when discussing additional easy policy at its

October 30-31 meeting, as many board members already chorused the necessity of

pre-emptive policy action at the July meeting. 

     GDP rose 0.4% q/q in Q2, or an annualized +1.8%, thanks to stronger private

consumption and capital investment as net exports fell, preliminary data

released Friday by the Cabinet Office showed.

     Private consumption however, which accounts for 60% of Japan's economy,

rose 0.6% in the quarter, after rising a revised 0.1% in Q1. Business investment

rose 1.5% q/q in Q2, accelerating from a revised +0.4% in Q1.

     Net exports of goods and services -- exports minus imports -- made a

negative 0.3 percentage point contribution to the total domestic output. It was

the first negative contribution in two quarters after pushing Q1 GDP growth up

by 0.4 percentage point.

     BOJ economists expect private consumption to rise in Q3 due to the

front-loaded surge in demand before the tax hike, before weakening in Q4,

although the magnitude of the slowdown will be smaller than that seen around the

2014 hike.

     --GLOBAL UNCERTAINIES CONTINUE

     Sustained uncertainty over the global economy will likely add further

downward pressure on consumer spending and possibly delay the implementation of

capital investment, the economists posit and the continued impact on exports

will delay the recovery further.

     Concerns have already been expressed by BOJ policymakers. At the recent

policy meeting, one board member said, "A recovery in the global economy, which

is expected to be seen in the second half of the fiscal year, does not seem to

be observed before the scheduled consumption tax hike," according to the summary

of opinions from the July 29-30 meeting released Wednesday.

     Another board member warned of an accelerating downturn if both internal

and external demand slowed at the same time.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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