Japan’s economy shrank more sharply than expected in the second quarter, and revised growth domestic product data released today show an annualised contraction of 1.2 per cent. In general we had been expecting a downward revision following evidence last week that capital spending, a big driver of growth, had slowed sharply. But the fall of 0.3 per cent in quarter-on-quarter terms against a preliminary estimate of 0.1 per cent growth was deeper than even we expected.
The reversal from annualised growth of 0.5 per cent to a decline of 1.2 per cent in the second quarter is explained almost entirely by a change in the assessment of capital spending. Preliminary data indicated that this had grown at an annualised rate of 4.9 per cent, but this figure has now been revised down to a contraction of 4.8 per cent.
This kind of data has lead JPMorgan to revise down its estimate for annual growth in the year to end-March 2007 from above 2 per cent to 1.6 per cent. Even more to the point they now expect the central bank to refrain from a rate rise until at least next year, with the implication that there would be minimum a one-year gap between quarter-point rate increases. And this is at the earliest!
Anyway, here's the revised chart.
My personal feeling is that the Japanese expansion has been steadily losing momentum since the end of 2005. Exceptional global conditions in the last quarter of 2006 gave a hefty push to Japanese exports, and, as a consequence, to capital spending (domestic consumer demand has hardly budged). Since I doubt in the current environment that these global conditions will be reproduced this autumn (indeed, the opposite may hold if the US now goes into recession) I am not anticipating a recurrence of what happened in Q4 2007. It remains to be seen, at a global level, how much of the expansion which took place during the back end of 2006 was really sustainable (on Eastern Europe, which was an important part of the picture I certainly have my doubts) and how much was an "excess" which is now in the process of being corrected. Only time will tell. But in the meantime I am certainly not forecasting any further rate hikes from the BoJ, either in what remains of this year, or during as far forward as we can see into 2008.
