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Citi

Is Japanese Economic Growth Slowing?

Japan’s Q2 GDP surprised on the upside, expanded at an annualized rate of 1.9%, more than the average estimate of 1.4%, recovering from the -0.6% contraction in Q1.

The rebound was boosted by an increase in business spending. Capital spending has the biggest increase since Oct-Dec 2016, it rose 1.3%, double the average estimate of 0.6%. Strong corporate profits are driving business investment and also wage growth.

Private consumption also increased 0.7% QoQ. High wages supported consumption. Labor cash earnings jumped 3.6% and bonus pay rose 7% YoY in June, having the fastest pace of growth since 1997. However, net exports subtracted 0.1 percentage point from GDP growth due to the uncertainty stemmed from trade dispute.

 

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Economy: The Japanese economy may continue to have slightly above trend growth in the coming quarters. But there are also downside risks from trade tensions, tightening monetary conditions and pressures from China/EM slowdown on global business investment. Citi expects Japan GDP to moderate to 1.1% from 1.7% in 2017.

FX: Japanese Yen rebounded after the strong Q2 GDP data, further strength in the short term will depend on the US inflation and USD trend. Citi analysts expect a range-bound market for JPY amid USD strength.

Equities: Although earnings are holding up relatively well at 9% expected for 2018, uncertainties in monetary policy and trade could hold down industrials and other exporters.

 

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