Japan’s GDP contracted -1.7% q/q in 2Q14, the biggest decline since 1Q11 when the Great East Japan Earthquake occurred. From a year ago, real GDP contracted -0.1%. The GDP deflator rose 1.7% q/q, or 2% y/y, in the second quarter. The contraction was largely in line with expectations and was mainly driven by the payback of the front-loaded demand ahead of the April VAT hike, a constraint on capex amidst the end of PC replacement demand accompanying the termination of Windows XP support and strengthened emissions regulations on special diesel vehicles based on the Off-Road Law. However, net exports contributed +1.1% to growth as decline in imports (-5.6% q/q) outpaced that of exports (-0.4% q/q).
Separately, the BOJ minutes for the July meeting showed that some of the board members were getting more cautious over the possibility that inflation would reach a sustained 2% target by fiscal 2015. As mentioned in the minutes, ‘some members held a more cautious view of the outlook for prices compared with the forecasts in the baseline scenario, mainly because there seemed to be a high degree of uncertainty surrounding the view that the year-on-year rate of increase in the CPI would reach around 2% around the middle of the projection period (to fiscal 2016)’.
Note that the BOJ has made some changes in the language in the August meeting, compared with the July one. For instance, the BOJ noted that ‘exports have shown some weakness’ in August, compared with ‘exports have recently levelled off’ in July. On industrial production, the BOJ retained the language that IP ‘has continued to increase moderately as a trend’ but added that ‘it has recently shown some weakness’ in August. However, the economic outlook was largely unchanged, stating that the ‘economy is expected to continue its moderate recovery trend, and the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike are expected to wane gradually’.
The GDP report, which came in largely in line with expectations, should not alter the BOJ’s economic outlook which was rather optimistic. However, 3Q14 data should be critical in triggering the BOJ’s monetary decision.