Japan’s Q2 GDP significantly outperformed expectations, soaring to a 6% SAAR* from 3.7% in Q1. This robust performance was primarily driven by a surge in exports, while domestic demand indicators, such as private consumption and imports, contracted. We have revised our 2023 growth forecast up from 1% to 2%, to reflect the Q2 surprise.
However, a divergence among sectors continued and we are not changing the growth profile for the subsequent quarters. A modest consumption growth is not enough to cancel out a contraction in exports, which will result in a mild economic slowdown in H2.
We expect private consumption to moderately recover in H2 despite the surprising decline in Q2. A steady increase in tourism, due to the economic reopening, alongside a tight labour market and increasing wage growth, will continue to support consumption.
Moreover, we expect the strong export performance to taper off, as manufacturing output and new orders fell further in August, indicating a weak demand.
Finally, inflation persistently exceeded expectations, with the core CPI (ex. fresh food and energy) remaining above 4%. Inflationary pressure has remained strong across all measures. While we believe inflation has peaked and will start to decline, it will likely remain above the BoJ’s 2% target until mid-2024. Core CPI is likely to reach 4% by the end of 2023.
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