Signs point to growth in Japan

Growth paused in the second quarter, but DBS says leading indicators point to an improvement in the next three months.

DBS Group Research noted:

GDP growth seems to have paused in 2Q after a strong expansion of 4.7% QoQ saar in 1Q. Industrial production plunged -3.1% MoM sa in May (-2.6% 3M/3M saar). PMI manufacturing dropped to 49.9 in June, falling below the neutral mark of 50 for the first time so far this year.

Although investment and consumption have both remained solid due to reconstruction and government subsidies on car purchases, exports have remained weak and feeble, restricting the overall growth performance.

That said, as the concerns over the European debt crisis have subsided, some of the leading indicators suggest a modest improvement in the growth momentum in 2H. The Tankan survey on large enterprises in the manufacturing industry showed an increase in business confidence in 3Q (+1, versus -3 in 2Q).

The forecast of industrial production also points to a recovery in growth to more than 2% MoM sa in June and July. As such, we think the Bank of Japan will opt for a wait and see approach while they monitor the latest development in the economic trend. No policy change is expected at the BOJ meeting on July 12th.