Whose spending was it?

The second preliminary estimate lifts April-June growth to an annualised 1.4 per cent, and the arithmetic behind that number is not evenly spread. Government consumption rose an annualised 6.9 per cent. Private consumption did not move at all, at 0.0 per cent, and business investment fell 3.7 per cent. One flow expanded and the two that make up private demand did not.[1]

Start by dropping the idea that a headline growth rate tells you where the demand came from. In accounting terms the quarter's output was bought, and the buyer that increased its purchases was the state. Residential investment fell an annualised 2.3 per cent and public fixed investment 1.8 per cent, so this was consumption spending by the government rather than a capital programme, while household consumption fell 0.2 per cent.[1]

Nominal pay and the imported price level

July cash earnings rose 4.7 per cent from a year earlier and real earnings 2.4 per cent, against 4.0 per cent and 2.2 per cent in June. Contractual earnings rose 4.1 per cent. The distance between the two headline numbers is a price level, and the pay increase passes through it before it reaches a household.[2]

Where that price level comes from is visible in the same month's external accounts: imports rose 25.9 per cent to 11,656.0 billion yen and exports 24.1 per cent to 11,256.1 billion yen, and crude oil averaged 114.35 dollars a barrel, 60.2 per cent above a year earlier. A current-account surplus of 2,988.9 billion yen sits on top of a goods deficit of 399.9 billion yen. The imported cost that widens the goods deficit is the same cost that stands between a 4.7 per cent nominal wage and a 2.4 per cent real one.[2], [3]

The signal to watch

A tightening case built on wages needs the wage to reach spending. In the quarter that has just been revised, household consumption fell an annualised 0.2 per cent even as pay accelerated, which points at the price level rather than at a household that has decided to save. The alternative reading is timing: the 4.7 per cent rise is a July number and the quarter closed in June.[1], [2]

If crude oil stays above 114.35 dollars a barrel in the months after July, the observable signal to watch is household consumption in the Cabinet Office's next quarterly estimate: another flat or negative reading places the adjustment on the household rather than on the government's flow.[1], [3]