By Fortune Editors and Reuters
August 14, 2017

Japan‘s economy expanded at the fastest pace in more than two years in the second quarter as consumer and company spending picked up, highlighting a long-awaited bounce in domestic demand.

The world’s third-largest economy expanded by a much stronger-than-expected annualized rate of 4.0 percent in April-June, posting its longest uninterrupted run of growth in a decade, official data showed Monday. That was the fastest growth in over two years, and the sixth straight quarter of expansion. Compared to the previous quarter, the economy expanded 1.0 percent, well above a median estimate of 0.6 percent. The government also slightly revised upwards its estimate of first-quarter growth to an annualised 1.5%.

Activity is expected to continue to improve in coming quarters, offering the Bank of Japan (BOJ) hope that a tight labor market is finally starting to boost wages and consumer spending. The rosy data were also a vindication for Prime Minister Shinzo Abe’s government, which has faced criticism that its economic agenda has not done enough to revive the country’s fortunes.

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“The engines of consumer spending and capital expenditure both fired well in the second quarter, and that’s why domestic demand was so strong,” said Hidenobu Tokuda, senior economist at Mizuho Research Institute.

“The pace of growth may moderate slightly, but we are still in recovery mode. This is a positive development for inflation.”

Japan‘s growth had been largely reliant on robust exports earlier in the year, though there were signs private consumption was picking up.

Private consumption, which accounts for about two-thirds of GDP, rose 0.9 percent from the previous quarter, more than the median estimate of 0.5 percent growth. That marked the fastest expansion in more than three years as shoppers splashed out on durable goods such as cars and home appliances. Consumers also spent more money on dining out, the data showed. These are all encouraging signs that consumer spending is no longer the weak spot in Japan‘s economic outlook. Employees’ wages rose 0.7 percent, the biggest increase since the third quarter of last year. Corporate investment also outpaced expectations.

External demand, by contrast, subtracted 0.3 percentage point from GDP growth in April-June in part due to an increase in imports. This is notable because Japan usually relies on exports to drive growth.

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“The fact that the economy was able to grow this much without gains in exports shows our fundamentals are solid,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“Consumption gains could slow a little in the following quarter, but the foundations for a recover in consumer spending are in place.”

Japanese Economy Minister Toshimitsu Motegi was more cautious on the outlook for domestic demand and pledged to implement extra measures to strengthen the economy.

“If you ask me whether private consumption has fully recovered, I would say it still lacks strength in some areas, which will need to be followed with policy,” Motegi told reporters.

While growth was faster than expected, it is not expected to nudge the Bank of Japan into dismantling its massive stimulus program any time soon, as inflation remains stubbornly weak. Since launching quantitative easing in April 2013, the BOJ has pushed back the timing for reaching its 2 percent inflation target six times, due in part to weak consumer spending.

 

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