Japanese economy surges beyond expectations

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Driven by strong domestic demand, Japanese economic growth accelerated to 1.0% QoQ in Q2.

The extent of the Japanese economic surge in H1 exceeded most expectations. GDP grew for the sixth consecutive quarter in Q2 and accelerated from an upward-revised 0.4% QoQ in Q1 to 1.0% QoQ in Q2, according to the preliminary estimate. Very encouragingly, growth has rotated from external toward more domestic factors. Private consumption growth accelerated to 0.9% QoQ, while fixed capital formation even surged 2.8% QoQ, driven by both private and public investment. In what is likely a temporary blip, falling real exports in combination with solid imports growth led to a negative contribution of net trade to Q2 GDP growth.

Despite strong growth, inflation developments were rather lackluster. On the positive side, nominal compensation of employees recovered in Q2, reaching 1.7% YoY (driven by a rise in employment rather than wages). Meanwhile, the domestic demand deflator only printed 0.4% YoY, and the overall GDP deflator remained in negative territory due to rising import prices. Nevertheless, we expect inflation to recover somewhat in H2, which could in turn weigh somewhat on consumption growth. Also, the manufacturing sector is unlikely to keep the strong H1 pace. In sum, we would expect economic growth to weaken somewhat in H2, but to remain above potential.

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