Japan downgrades second-quarter GDP as trade war hits business investment

Japan’s economy grew at a slower pace than initially estimated in the second quarter as the US-China trade war prompted a downward revision of business spending, intensifying calls for the central bank to deepen stimulus this month.

Weakness in the global economy and worsening trade protectionism have emerged as risks to growth and added some pressure for the Bank of Japan (BOJ) to expand stimulus when it meets next week.

The economy grew an annualized 1.3 percent in April-June, revised Cabinet Office data showed Monday, weaker than the preliminary reading for 1.8 percent annualized growth and in line with economists’ median forecast.

The annualized growth rate translates into a quarter-on-quarter expansion of 0.3 percent from January-March, compared with a preliminary reading for a 0.4 percent gain.

“There’s a possibility growth will turn negative in the October-December quarter,” said Izuru Kato, chief economist at Totan Research.

“If worries about such negative growth deepen (in the coming months), the Bank of Japan could consider lowering interest rates further into negative territory.”

Capital spending rose just 0.2 percent from the previous quarter, much lower than a preliminary 1.5 percent rise and the median forecast for a 0.7 percent increase.

The capex downgrade was due to government statisticians including a demand-side survey of capex in the revised GDP data, which was not in the preliminary figures and showed weakness in the sector.

Stefan Angrick, senior economists at Oxford Economics, said manufacturers cut spending in the quarter amid a re-escalation in US-China trade frictions.

“While investment by non-manufacturers, particularly software-related, maintained robust growth, it was not enough to completely offset the contraction in spending by manufacturers,” Angrick said in a note.

A private sector business survey published last week showed Japanese manufacturing activity declining for a fourth straight month in August while export orders remained in contraction for a ninth month in a row.

Private consumption, which accounts for some 60 percent of gross domestic product, advanced 0.6 percent from the previous three months, matching the preliminary reading.

Net exports - or exports minus imports - subtracted 0.3 percentage point from revised GDP growth, signaling the economy is feeling the pain from the global growth slowdown.

BOJ PRESSURE

The outlook for the world’s third-largest economy remains clouded as risks from declining manufacturing overseas and at home hit exports.

Analysts have also warned of a possible drop in domestic consumption after Japan raises its sales tax to 10 percent next month, which could hit one of the economy’s few growth drivers.

A separate Cabinet Office survey released on Monday pointed to a bleak outlook for consumption. The survey called the “economy watchers” sentiment index, which measures business confidence among workers such as taxi drivers, hotel workers and restaurant staff, was marginally higher than a more than three-year low hit in July.

The outlook index, indicating the level of confidence in future conditions, slipped to the lowest level since March 2014, the month before Japan’s last sales tax hike in April 2014.

Amid the risks to growth, BOJ Governor Haruhiko Kuroda has kept the door ajar for cutting interest rates further into negative territory, saying last week such move is among the bank’s policy options.