Japan's decrease in GDP shows the importance of consumer spending (Part 3 of 6)
Other factors that impacted Japan’s 2Q GDP growth
Gross domestic product (or GDP) grew rapidly in the January–March period. Consumers rushed to buy ahead of the 3% increase in the consumption tax rate in April. It was widely anticipated that the economy would shrink in the following quarter. However, the extent of the contraction suggests that it can’t be attributed to the decrease in consumer spending alone. Other factors caused the GDP to decline in the second quarter.
Other factors that affected second quarter GDP
- Private investment decreased by 9.7%. Consumers and businesses held back on spending following the 3% increase in the consumption tax.
- Recent retail sales and factory output figures both indicated a negative impact from the consumption tax increase.
- The quarter saw a 1% increase in inventories.
- Real wages fell by 3.2% year-over-year (or YoY) in the second quarter—the steepest drop in 18 quarters. Although the labor market has improved with the ratio of job offers to job seekers hitting a 22-year high of 1.10 in June, businesses are trying to fill their manpower needs by hiring irregular workers such as part-time employees. New hires of regular full-time employees remains low.
- Imports slumped by an annualized 20.5% while exports fell by 1.8%. For the second quarter, exports fell 0.4% from the previous quarter in real terms.
The decrease in exports could affect export-oriented Japanese companies like Canon (CAJ), Honda (HMC), and Toyota (TM), and and exchange-traded funds (or ETFs) investing in them like the iShares MSCI Japan ETF (EWJ) and the WisdomTree Japan Hedged Equity Fund (DXJ).
The decrease in exports isn’t what Prime Minister Shinzo Abe wanted to achieve through his Abenomics approach. It’s like the quantitative easing measures in the U.S. The approach required the Bank of Japan to pump billions of dollars into the Japanese economy by buying up government debt. This drove the yen down against the dollar and made exports more profitable. Despite these measures the exports fell in the second quarter. Does that signal the failure of Shinzo Abe’s Abenomics? Let’s find out in the next part of this series.
Browse this series on Market Realist:
- Part 1 - Why Japan’s tax increase impacted GDP and consumer spending
- Part 2 - Why the decrease in consumer spending impacted Japan’s 2Q GDP
- Part 4 - Overview: Shinzo Abe’s Abenomics
- Budget, Tax & Economy