Japan Q2 GDP Gets a Boost from Consumer Spending; Political Uncertainty Clouds Outlook

TradingKey - On Monday, September 8, Japan's Cabinet Office announced an upward revision of the country's second-quarter GDP, driven by increases in private consumption and savings. The GDP growth rate was adjusted from 0.3% to 0.5% quarter-on-quarter, equating to an annualized rate revised from 1.0% to 2.2%. This marks the fifth consecutive quarter of growth for both figures.

The robust economic data, coupled with the resignation announcement from Prime Minister Shigeru Ishiba, who also heads the ruling Liberal Democratic Party, led to a depreciation of the yen and a broad rally in Japanese stocks. The TOPIX briefly surged over 1% to a new all-time high of 3,146 points before closing up at 3,138 points, while the Nikkei 225 gained 1.62%, nearing its historical peak.

Despite the strong performance, industry experts remain cautious. Private consumption, which accounts for more than half of Japan's economy, saw its growth rate revised from an initial 0.2% to 0.4%. The Cabinet Office attributed this to a recovery in dining, gaming sales, and corporate spending, which were newly added data points that were not fully included in the initial report.

Shinichiro Kobayashi, Chief Economist at Mitsubishi UFJ Research and Consulting, projected that Q3 consumer spending may not sustain such vigorous growth, potentially insufficient to offset the negative impact of tariff-induced export declines.

As a key indicator of private demand, corporate equipment investment in Q2 was revised to a 0.6% increase, below the initial report of 1.3% and previous expectations of 1.2%.

The contribution of private inventories to GDP growth was adjusted from an initial estimate of -0.3% to -0.04%, following an increase in work-in-progress and raw material inventories. Toshihiro Nagahama, Chief Economist at Dai-ichi Life Research Institute, noted that this upward revision of Q2 inventories could exert pressure on Q3 economic growth, possibly leading to a contraction.

Another major concern is political uncertainty. Analysts suggest that unless the new government effectively addresses structural issues, the sustainability of economic growth may be jeopardized. Typically, an upward revision in Japan's GDP indicates growth in wages and household spending, which would continue to drive economic expansion.

However, Prime Minister Ishiba's resignation has disrupted this certainty. Reports indicate that the two leading candidates for the premiership support differing economic policies—one favors looser monetary policy, while the other advocates for structural reforms. The election outcome will determine the future direction of macroeconomic policy and economic prospects.