Chart of the Week : Japan’s GDP – Nothing More Than a Sugar High

Japan’s Cabinet Office takes up to seven weeks after the quarter-end to publish its preliminary GDP estimate, making it the last of the ‘Big Four’ to do so. Despite that delay, it also makes the largest revisions to that initial estimate. With that in mind, and recognising that the data are unreliable, we have expanded our suite of proprietary indicators to include a Japanese Economic Sentiment Indicator. That, as we recently highlighted to clients, pointed to an upswing in economic activity that was yet to be reflected in the hard data. However, overnight, the Cabinet Office announced that Japan’s economy grew by an annualised 4.0% in the second quarter of 2017, exceeding the consensus estimate of 2.5% but surprisingly close to the rate implied by our Economic Sentiment Indicator.

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Our Economic Sentiment Indicator (ESI), which uses a technique known as principal component analysis to distil information from numerous consumer and business surveys, first started to diverge from Japan’s official GDP numbers in the middle of last year. That appears to have been driven by improving corporate sentiment, related both to a weakening yen and increasing demand from China.

Indeed, Japan’s export growth to China has picked up sharply since the world’s second-largest economy began ‘doubling down’ at the beginning of 2016. The coveted depreciation of the yen since last November, motivated by expectations of policy divergence and a more ‘risk on’ environment, also appears to have contributed to improving business sentiment.

Today’s provisional GDP estimate suggests that both business investment and household consumption drove growth in the second quarter, with net trade exerting a small drag as export volumes fell by 1.9% (SAAR). On the surface, that is at odds with survey-based data, which continue to point to rising optimism among firms, particularly manufacturers. Nevertheless, that optimism does appear to have fed through to investment, which rose 11.7% on the quarter, contributing 2.6 percentage points to quarterly, annualised GDP growth.

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