In Japan, Still Waters Merit Attention to Any Ripple

Executive Summary

Even as many of the world’s major central banks have been steering toward normalization of monetary policy, the Bank of Japan (BoJ) has remained a holdout. The GDP report for the second quarter offers nothing that will compel BoJ policymakers to change course. That said, there are incremental changes going on in the Japanese economy, which combined with some logistical constraints on the viability of continuing central bank balance sheet expansion forever, may eventually warrant a change in forward guidance from the BoJ. In this special report, we unpack the latest GDP data and consider how some of these small changes may eventually allow the BoJ to let up on the gas after years of having the accelerator stomped to the floor. The most consequential factor in our view is the extent to which recent wage gains will be sustained and whether that will pass through to a broader push to sustained inflation at, or near, the 2.0 percent target.

After Soft Start, Much Better Growth in Japan in Q2

Real GDP growth in Japan came in at a 1.9 percent annualized rate in the second quarter, although revisions to previously-reported numbers showed the contraction in the first quarter was slightly larger than first thought (Figure 1). Still the outcome in the second quarter was better than expected, and alleviates concern that Japan’s economy was in trouble. Consumer spending rebounded in the quarter, growing at a 2.8 percent annualized rate (Figure 2). The resurgence of the Japanese consumer of late has been a pleasant surprise. Department stores in Tokyo reported 6.9 percent year-over-year sales growth in June—that is the biggest yearly gain in about three years.

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