Chief economist update: Japan's sun shines

Japan's economy grew 0.7% in the June quarter after contracting 0.2% in the March quarter. This is stronger than the Cabinet Office's preliminary estimate of 0.5% and is the fastest growth rate since the first quarter of last year (0.7%).

This is good news for Japan especially as it comes at a time when US president Donald Trump is threatening to train his sights on Tokyo's trade with the US. The US trade deficit with Japan widened 2.9% to US$5.5 billion in July, notwithstanding the yen's 1.4% appreciation vis-a-vis the greenback this year to date.

The details of the national accounts also provide positive underpinnings for the Japanese economy with growth primarily driven by domestic private demand.

Private demand expanded 1.1% over the June quarter, an upward revision from the preliminary estimate of 0.7% and a strong turnaround from the first quarter's 0.4% decline. Private consumption expanded 0.7% (from -0.2% in the March quarter) and business investment jumped 3.1% (from 0.7% in the first quarter) - the fastest growth rate in more than three years.

As such, private demand contributed 0.8 percentage points to June quarter GDP - private consumption added 0.4 pps and capital expenditure 0.5 pps. Public demand rose 0.2% over the second quarter but similar to inventories, provided to contribution to GDP growth in the June quarter.

Net exports subtracted one percentage point from overall GDP growth as imports grew faster than exports. Imports rose by 0.9% in the June quarter following a 0.2% increase in the first quarter further underlining the strength of domestic demand in the economy.

Export growth slowed to 0.2% in the June quarter from 0.6% in the previous three-month period.

Net exports would provide an even bigger subtraction from growth should Trump take as aggressive a stance on Tokyo as he is on China. This should not be too much a problem so long as Japanese domestic demand maintains its growth momentum as shown in the June quarter national accounts.

This could be the reason why unlike China, Prime Minister Shinzo Abe is taking a different posture against Trump. According to Bloomberg: "In his first policy speech since President Donald Trump renewed pressure on Japan to sign a bilateral trade deal, Prime Minister Shinzo Abe pledged to champion free trade."

"Tit-for-tat trade sanctions don't benefit any country," Abe told a gathering of lawmakers from the ruling Liberal Democratic Party on Monday, without mentioning Trump by name. "Now is the time for Japan to take the lead in creating the rules of the new era as a flag-bearer for free trade."

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: JapanUSChinaTokyoPrime Minister Shinzo AbePresident Donald TrumpBloombergCabinet OfficeDonald JLiberal Democratic PartyMonday
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