Data updates
▶　The Q3 index of industrial production declined for the first time in two quarters.
▶　Rush demand before the consumption tax hike is evident in September data on retail sales, which saw robust growth.
▶　Both planned residential construction expenditure and capital goods shipments increased in Q3.
▶　Q3 real net exports expanded.

Forecasts
▶　Our forecast for Q3 real GDP growth is an annualized +0.9%. This forecast is likely to be revised upwards once September data on private final consumption is released.
▶　We forecast an overall GDP deflator of +0.2% QoQ in Q3.

Data updates
▶　The index of industrial production in August declined for the first time in two months (-1.2% MoM).
▶　Rush demand before the consumption tax hike this year seems limited compared to the previous tax hike in 2014.
▶　Both planned residential construction expenditure and capital goods shipments increased in July-August.
▶　Real net exports expanded.

Forecasts
▶　We forecast real GDP growth (expenditure side) of +0.6% QoQ in Q3, or +1.4% if annualized. The production-side forecast is an annualized +2.6%. The average of the two forecasts is an annualized +2.0%.
▶　We expect that the reactionary fall after the tax hike this year will be milder than it was five years ago.
▶　We forecast an overall GDP deflator of +0.1% QoQ in Q3.

Summary: Further economic deterioration in sight
▶ Production in July expanded MoM for the first time in two months.
▶ Although Kansai logged a trade surplus in August, the total trade volume kept declining. The slowdown of the Chinese economy had a major negative impact. In contrast, the impact of trade tensions with Korea remains limited to individual firms.
▶ The Economy Watchers’ Diffusion Index (DI) in August improved MoM for the first time in four months.
▶ Nominal wages in June increased in Shiga, Hyogo and Kyoto, but declined in Nara and Wakayama.
▶ Sales by large retailers in July fell below last year’s level for the first time in three months.
▶ Housing construction expanded due to rush demand, but the increase was modest compared to the one seen before the previous tax hike in 2014.
▶ The effective job offers-to-applicants ratio in July declined slightly. The unemployment rate declined to 2.4%.
▶ July was the 17th month of uninterrupted YoY growth in public construction works.
▶ The number of international arrivals at Kansai International Airport in August grew YoY for the 11th consecutive month. However, growth decelerated to +4.9% (from +15.5% in July) due to the deterioration in Korea-Japan relations.
▶ China’s economic slowdown become more evident in August. Car sales kept declining (-8.1% YoY), and investment in the industrial sector decelerated significantly. China’s total trade volume shrank for the fourth consecutive month.

Data updates
▶　Q2 real GDP grew an annualized +1.8% QoQ, expanding for the third consecutive quarter.
▶　The consumption goods production index in July fell -0.3% compared to the Q2 average. In contrast, the capital goods production index in July increased +2.0% compared to the Q2 average.
▶　Compared to the Q2 average, real exports and real imports in July grew +2.1% and +1.1%, respectively. As a result, net exports expanded.
▶　The national Consumer Price Index (CPI) in July increased +0.6%YoY, expanding for the 31st consecutive month.

Forecasts
▶　Our forecast for Q3 real GDP growth (expenditure side) is +0.6% QoQ, or +2.6% if annualized.　The production-side forecast is an annualized +2.7%.
▶　We forecast an overall Q3 GDP deflator of +0.2% QoQ.

Summary: Further economic deterioration in sight

･ Production in June shrank MoM for the first time in three months.
･ Although Kansai logged a trade surplus in July, the total amount of trade declined YoY for the eighth consecutive month. The impact of the trade tensions with Korea are limited to individual firms rather than industries.
･ The Economy Watchers’ Diffusion Index (DI) in July deteriorated MoM for the third consecutive month.
･ Nominal wages in May remained unchanged, but real wages decreased YoY for the third consecutive month.
･ Sales by large retailers in June exceeded last year’s level for the second month in a row.
･ The number of new housing starts in June contracted by -3.6% YoY, decreasing for the third consecutive month.
･ Both the effective job offers-to-applicants ratio and the unemployment declined slightly in June.
･ June was the 16th month of uninterrupted YoY growth in construction works.
･ The number of international arrivals at Kansai International Airport in June grew YoY for the tenth consecutive month.
･ China’s Purchasing Managers’ Index (PMI) in July improved slightly, but it remained below 50 for the third month in a row.

▶　We forecast a real annualized GDP growth of +1.5% in Q2 (expenditure side). The production-side forecast is an annualized +2.1%.

▶　Q2 GDP growth was mainly driven by domestic demand, while net exports are expected to have made a negative contribution.

▶　The latest official figures suggest a robust increase in production, consumption and capital investment in Q2. However, this might be temporary, as the forecasts from the past month suggest a growth deceleration trend.

▶　Q2 CPI inflation is expected to have decelerated to a modest +0.1% QoQ. We forecast an overall GDP deflator of -0.1% QoQ.

Summary: Further economic deterioration in sight

･ Production in May expanded MoM for the second month in a row.
･ Although Kansai registered a trade surplus for the first time in two months in June, both exports and imports shrank YoY.
･ The Economy Watchers’ Diffusion Index (DI)  in June deteriorated MoM for the second consecutive month.
･ Both nominal and real wages in April decreased YoY for the second consecutive month.
･ Sales by large retailers in May expanded YoY for the first time in two months.
･ The number of new housing starts in May plummeted sharply (-27.5% YoY), decreasing for the second consecutive month.
･ Although the effective job offers-to-applicants ratio in May declined slightly, the absolute numbers of both job offers and applicants increased. The unemployment rate remained unchanged.
･ Construction works in May expanded YoY for the 15th month in a row. However, public works contracts declined.
･ The number of international arrivals at Kansai International Airport in June grew YoY for the ninth month in a row.
･ China’s Q2 real GDP expanded +6.2% YoY, the slowest growth rate since 1992.

▶　Despite the small upward revision in Q1real GDP official estimates, there are reasons for concern as the  demand-side GDP components all declined QoQ. Growth was mainly driven by the expansion in private inventory changes and shrinking imports.

▶　Contrary to our expectations of an economic recoil following the long holidays, May data showed a robust increase in production. However, this might be temporary.

▶　Regarding Q2, we forecast a real annualized GDP growth of +0.2% (expenditure side). The production-side forecast is an annualized +0.6%. The forecasts from the past month suggest a growth deceleration trend.

Summary: Current economic deterioration expected to persist

• Production in April expanded MoM for the first time in six months, but output was -0.5% lower than the Q1 average.
• Kansai registered a trade deficit in May for the first time in four months. Both exports and imports shrank YoY.
• The Economy Watchers’ Diffusion Index (DI) in May deteriorated MoM for the first time in two months.
• Both nominal and real wages in March decreased YoY for the first time in three months.
• Sales by large retailers in April shrank YoY for the first time in two months.
• The number of new housing starts in April decreased YoY for the first time in two months.
• The job offers-to-applicants ratio in April increased slightly. The unemployment rate remained unchanged.
• Construction works in April expanded for the 14th consecutive month.
• The number of international arrivals at Kansai International Airport in May grew YoY for the eighth month in a row.
• China’s Purchasing Managers’ Index (PMI) in May deteriorated for the second consecutive month.

▶　Although real GDP in Q1 expanded for the second consecutive quarter, there are reasons for concern as the  demand-side GDP components declined QoQ. Growth was mainly driven by the expansion in private inventory changes and declining imports.

▶　For Q2, we forecast real annualized GDP growth of +0.9% (expenditure side). The production-side forecast is an annualized +1.2%. The forecasts from the past three weeks, however, suggest a negative trend. We forecast a GDP deflator of -0.0% QoQ in Q2.

Summary: Economy remains sluggish with signs of potential deterioration

• Production in March shrank MoM for the first time in two months.
• The April trade balance remained positive for the third month in a row, but it shrank YoY.
• The Economy Watchers’ DI in March improved MoM for the first time in two months.
• Real wages in February increased YoY for the second month in a row.
• Sales by large retailers in March expanded for the first time in five months.
• New housing starts in March increased YoY for the first time in two months.
• The effective job offers-to-applicants ratio in March remained unchanged.
• March was the 13th month of uninterrupted YoY growth in construction.
• International arrivals at KIX in April grew YoY for the seventh month in a row.
• China’s PMI in April deteriorated for the first time in two months.