Japan's GDP Not as Bad as it First Appears

At first glance, today's Japanese GDP report was really ugly. Only 0.2% volume growth (0.8% at an annualized rate) from the previous quarter and only 0.1% (0.4% at an annual rate) after adjusting for terms of trade. This caused year over year growth to decline from 3.2% to 2% in volume terms and from 2% to 1.1% in terms of trade adjusted terms.

But if you look at the specifics, things aren't fully as bad.

First, as before, national income grew somewhat more than GDP due to a rising investment income surplus, although that increase slowed too.

Secondly, the components of demand are developing in a good way. Business investments soars and private consumption increases fairly strongly too, while inventories are being reduced (something which is likely to be reversed) and residential investments is falling and so is government demand.

Falling government spending will help Japan to reduce its massive budget deficit without destructive tax increases and thus help make growth more sustainable.

Because of the strong details, the weak headline number is not as troubling as it seems as it will mean a strong bounce back in the third quarter is a near certainty. And because last year's third quarterv was so weak, the year over year growth number will likely bounce back even more strongly than the number for quartely change.