By Makiko Yamazaki
TOKYO, Aug 17 (Reuters) – Japan’s economy grew at a slower-than-expected pace in April-June, due to lacklustre household spending and business investment that analysts say mainly reflected one-off factors although the Iran war continued to cloud confidence.
Gross domestic product rose 1.1% in annualised terms, government data showed on Monday, missing a median market estimate of 2.0% in a Reuters poll and below an upwardly revised 1.9% expansion in the previous quarter.
While the data showed global uncertainties and a weak yen weighing on growth, analysts say much of the drag came from one-off factors and that robust economic momentum will likely keep the case for imminent interest rate hikes intact.
“Growth was positive, but the details were somewhat weaker than expected,” said Kazutaka Maeda, senior economist at Meiji Yasuda Research Institute.
“Still, given the disappointing results are likely to have been driven by temporary factors, I don’t think the latest data would suggest a weakness ahead or affect the timing of the Bank of Japan’s next interest rate hike,” which is now widely expected as soon as September, he said.
The reading translates into a quarterly rise of 0.3%, compared with the median estimate of a 0.5% increase.
Private consumption was the biggest disappointment, falling 0.02% versus market expectations for a 0.5% increase, the first drop in eight quarters.
While policy and regulatory changes temporarily boosted demand for durable goods such as automobiles and air conditioners, the effects of fee-free education and higher tobacco prices weighed on overall consumption, which accounts for more than half of economic output.
Consumption and wage trends are key factors the BOJ watches to gauge economic strength and determine the need for additional rate hikes.
Capital spending, a key driver of private demand, fell 1.2% in the second quarter, versus a market forecast for a 0.4% increase.
Analysts said the weakness stemmed from uncertainties caused by supply chain disruptions linked to the Middle East war. Additionally, the overseas sale of a large pharmaceutical patent asset was counted as a decline in capital spending and as an increase in exports for research and development services.
“The economy remains on a moderate recovery path, with export-driven growth offsetting weakness in domestic demand,” economy minister Minoru Kiuchi said in a statement.
“Strong wage growth and policy support are likely to sustain the recovery, while the impact of Middle East situations warrants caution,” he added.
TEMPORARY DRAGS
Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute, said the weakness in consumption was partly due to one-off factors, including a shift in spending into government consumption through measures such as free school lunches.
He also said the factors that dragged down capital spending, such as uncertainty linked to the conflict in the Middle East, are easing and corporate investment plans remain firm.
“Overall, I think we can say that the economy had remained resilient despite slower-than-expected growth,” he added.
Net external demand, or exports minus imports, added 0.5 percentage point to growth, largely because imports fell sharply after temporary disruptions to crude oil shipments through the Strait of Hormuz.
Exports remained resilient thanks to solid U.S. demand for Japanese hybrid vehicles and sustained global investment in artificial intelligence that supported shipments of semiconductor-related equipment and components.
Looking ahead, analysts cautioned that rising import costs and mounting upstream price pressures could eventually feed through to consumers, posing a risk to spending later this year.
“Government subsidies have helped contain consumer inflation so far, but a weaker yen and higher crude oil import costs raise the likelihood of broader price hikes from the autumn onward,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Private consumption could also see a pullback in July-September as the temporary boost to automobile and air-conditioner sales fades.
“While weak private consumption despite support from one-off factors is unlikely to immediately derail the BOJ’s rate-hike plans, it could reinforce the case for the central bank to proceed with tightening at a more gradual pace,” said Masato Koike, senior economist at Sompo Institute Plus.
A survey this month by the Japan Center for Economic Research showed 37 economists forecast annualised GDP growth to slow to an average 0.05% in the July-September quarter.
(Reporting by Makiko Yamazaki, Leika Kihara, Kentaro Sugiyama and Chang-Ran Kim; Editing by Sam Holmes)
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