Japan’s GDP shrinks 1.3% in 1Q11

The second quarter GDP reported a less-than-expected contraction of -1.3% QoQ saar, compared to a revised -3.6% in 1Q. The contraction was led by exports of good and services (-4.9% QoQ sa), as the supply chains were damaged due to the aftermath of the earthquake/tsunami/nuclear disaster in March. Private consumption also fell by -0.1% in 2Q. Public expenditures were stronger than expected, with public investment and government consumption respectively growing 3.0% and 0.5% on the back of disaster relief and reconstruction.

Indeed a V-shaped recovery has emerged from April, thanks to the restoration of infrastructures and power supply, as well as the recovery in sentiments and release of pent-up demand. As of June, exports, industrial production and retail sales have recovered respectively by 80%, 70% and 100% if comparing to their losses incurred as a result of the March disasters. A significant positive growth will soon be reflected in the 3Q GDP statistics. We expect the aggregate output/expenditures will completely recover to the pre-disaster levels by end-3Q. The leading indicators such as manufacturing production forecast index at 2.2% for Jul, 2% for Aug ,PMI at 52.1 in July, and machinery orders at 7.7% in June, broadly pointed to solid growth in 3Q.

Beyond that, there would be downside risks arising from weaker growth prospects in G2 and continued appreciation pressures on the yen which could potentially dampen Japan’s export outlook. Our whole-year GDP forecast of -05% requires a moderate growth of about 3.5% QoQ growth on average in 3Q-4Q11.