Japan's Economy Grew 1.1 Percent While Its Stock Market Gained 58

Japan's Economy Grew 1.1 Percent While Its Stock Market Gained 58

Japan's economy grew at an annualised 1.1 percent in the second quarter, the Cabinet Office said on Monday, roughly half the 2 percent economists had expected. Quarter on quarter the figure was 0.3 percent against a forecast of 0.5. The number lands in a country whose stock market is up more than 58 percent over the past year. Those two things are hard to square.

The setup was supposed to be better than this. The first quarter came in at 1.9 percent annualised, and exports had been running hot on the back of overseas demand for cars and electronics. The Bank of Japan has spent the year slowly walking away from the cheapest money in the developed world, and the case for doing that rested on an economy that could take it. Growth of 1.1 percent is not much of a cushion.

The damage came from inside. Capital expenditure fell 1.2 percent on the quarter when economists had it rising, with high input costs and the supply chain mess from the war in West Asia doing most of the work. Private consumption came in flat against an expected 0.5 percent gain. External demand was the one bright spot at 0.5 percent, beating its 0.3 percent forecast. So Japanese companies sold plenty abroad and then declined to spend the proceeds at home.

The yen sat at 159.36 to the dollar, barely moved. The Nikkei closed Friday at 68,714, up 0.59 percent on the day and still 58 percent higher than a year ago, though it has been drifting since the June record at 73,007. The GDP price index rose 2.6 percent against a 2.3 percent forecast, cooling from 3.2 percent in the first quarter but still well above where the Bank of Japan would like it. Inflation is easing slower than growth is.

The Bank of Japan is still expected to raise rates in September or October, and this print does not obviously change that, which is the uncomfortable part. Tightening into 1.1 percent growth and shrinking business investment is a different exercise than tightening into a boom. The yen near 160 is its own argument for moving, since a weak currency imports exactly the input costs that just killed capex. Governor and board get to pick which problem they would rather have.

So Japan heads into autumn with an equity market pricing one story and a national accounts release telling another. Exports fine, factories cautious, households sitting still. The 58 percent year does not depend on 1.1 percent growth holding up, until one day it does.