Japanese Shares Drop To Seven-Week Low On Weak GDP Report

Stocks in Japan dropped to a seven-week low overnight on reports that the world's third-largest economy grew much slower than expected in the second quarter.

Inflation also ran at a higher rate than anticipated, raising fears that the extraordinary expansionary policies of the both the Bank of Japan and Prime Minister Shinzo Abe's government will not be able to contain inflation.

Second Quarter GDP Data

Japan reported that the economy grew 0.6 percent in the quarter from the first quarter, missing estimates of GDP growth of 0.9 percent. The government also announced that the economy grew 0.9 percent in the first quarter from the fourth, a downward revision from the prior estimate of 1.0 percent.

On an annualized basis, second quarter GDP grew 2.6 percent from a year ago, well below the estimated 3.6 percent growth. The first quarter figure was revised down to 3.8 percent from 4.1 percent at the previous estimate.

Nominal GDP, the measure that includes inflationary effects, rose 0.7 percent in the quarter from the first quarter also missing expectations of a reading of 1.0 percent. Nominal GDP did improve over the first quarter's reading of 0.6 percent growth.

Inflation Roars

The government also reported that inflation rose faster than expected in the second quarter, raising fears that the expansionary economic policies of the Bank of Japan and the government will unleash a wave of uncontrollable inflation. The GDP deflator, the measure of inflation included in the GDP report, fell 0.3 percent from a year ago, better than the forecast 0.7 percent drop and also better than the prior reading of a decline of 1.1 percent.

The government also released CPI inflation data for July overnight which also showed an acceleration in inflation. GCPI inflation rose 0.5 percent in July from June vs. the expected rise of 0.2 percent. GCPI rose 0.1 percent in June. On an annualized basis, inflation rose 2.2 percent, much faster than the expected 1.9 percent rise.

Shares Fall As Yen Gives Back Ground

Japanese shares dropped overnight on the news. The Nikkei 225 Index fell 0.7 percent overnight with 143 stocks declining compared to just 70 advancing. Notable decliners included Softbank (OTC: SFTBF), which fell 4.01 percent in overnight trade.

The yen fell against the dollar with the pair also bouncing from a seven-week low. The USD/JPY rose 0.61 percent to 96.80 in early New York trade after initially declining on the headline news release.