With low-interest rates and manageable inflation, Japan is truly an outlier in the global economy.
While most of the world’s developed economies are struggling with growth, Japan surprised analysts with an outstanding surge in GDP in the second quarter. Japan appears as a financial outlier within the G7 economies insofar as its monetary policies.
Japanese GDP increased by a massive 6% year-on-year in the second 2023 quarter, way ahead of the 3,1% growth estimate. This represents a 1,5% quarterly growth, again almost doubling the 0,8% estimates.
This is the best-performing quarter for the Japanese economy since 2020. Covid restrictions have been completely erased in 2022 causing a surge in foreign tourism and exports.
Exports increased by 3,2% in the second quarter, mostly driven by car sales.
The Nikkei stock exchange in Tokyo slightly rallied on Tuesday, growing +0,56% before the bell.
However, this extreme growth masks a decrease in domestic demand, dropping 0,3% since Q1. Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute, presented a much more sober picture of the Japanese economy.
"The biggest factor was a decline in imports that pushed up GDP,” Tsunoda said. “It doesn’t mean a strong recovery in the Japanese economy."
Japan’s Economy Minister Shigeyuki Goto said they expect moderate GDP growth going forward, with risks coming from an uncertain global economy.
Inflation and monetary policy
The Japanese economy is allowed to grow this much by an apprehensive monetary policy by the Bank of Japan. The country has the lowest core inflation rate in the G7, sitting at 3,3%. By comparison, American core inflation is 4,7% and the EU’s is 5,5%.
Nevertheless, the Bank of Japan is worried about what increasing inflation can do to its recovering economy. At the same time, the BoJ appears unwilling to raise interest rates like its international peers yet.
The BoJ found a compromise at their latest meeting, maintaining interest rates low but raising the YCC. The Yield Curve Control (YCC) is a monetary instrument used by the BoJ to link the yield of 10-year bonds with interest rates.
The YCC used to allow a 0.25% difference in returns for long-term bonds compared to interest rates. In their latest meeting, the BoJ raised the YCC to 0,5%, allowing for better returns in 10-year bonds.
"As such,” Takumi Tsunoda concluded, “the central bank will maintain the current monetary policy and adopt a wait-and-see stance for the time being."
Meanwhile, the American Federal Reserve recently raised interest rates to 5,5% and might continue in September. By comparison, Japan’s interest rates are currently -0,1%.
