Preview: Japan Q1 GDP to Post First Contraction in 2 Quarters as Suspended Toyota Group Output Caused Widespread Slowdown, Service Export Pullback

By Max Sato

(MaceNews) – Japan’s gross domestic product for the January-March quarter is forecast by economists to post the first contraction in two quarters, down 0.4% on quarter, or an annualized 1.6%, as suspended output at Toyota group factories over a safety test scandal triggered a widespread slump beyond the auto industry after the economy narrowly averted a second straight contraction in the final quarter of 2023.

The median forecast for the Q1 real GDP growth is based on projections by 10 economists compiled by Mace News, which ranged from decreases of 0.8% to 0.2% on quarter, or a decline of 3.3% to 0.7% annualized.

The Cabinet Office will release preliminary GDP data for the first quarter of 2024 at 0850 JST on Thursday, May 16 (2350 GMT/1950 EDT Wednesday, May 15).

The expected fall in the GDP would follow a slight 0.1% rise on quarter in the fourth quarter, or an annualized 0.4%, which was revised up from the initial estimate of a 0.1% slip, or 0.4% contraction annualized. The meager growth in January-March was led by a solid rebound in business investment and a rise in net exports due to a temporary surge in services income (copyright royalties), which offset the drag from declines in consumption and public works.

From a year earlier, the economy is expected to have slipped 0.2% in January-March for the first drop in 12 quarters, following a 1.2% rise in October-December.

Looking ahead, the economy in April-June is expected to show modest growth as auto production resumed in March but consumer spending remains sluggish amid elevated costs for food and other necessities. Both households and businesses are concerned that the weakness of the yen, whose value has hit 34-year low against the dollar, will cause a resume spike in import costs at a time when the prices for some commodities are rising.

Domestic Demand, Consumption Remain Lackluster

Domestic demand is forecast to trim the first quarter GDP by 0.1 percentage point (forecasts range from a negative 0.3 point to a positive 0.5 point), after lowering fourth quarter growth by 0.1 point. A solid rebound in public works spending is expected to be offset by a sharp pullback business investment and continued sluggish consumer spending.  

Private consumption, which accounts for about 55% of GDP, is expected to fall 0.2% on quarter for a fourth straight quarterly decline (forecasts range from a 0.5% drop to a 0.4% gain). It would follow a 0.3% drop in the fourth quarter.

The Bank of Japan’s supply-side consumption activity index rebounded a seasonally adjusted 0.6% on the month in February after edging down 0.1% in January and falling 1.1% in December. The index slipped 0.6% in the January-February period compared to October-December, when it dipped 1.1%. Figures exclude inbound tourism consumption but include outbound tourism spending.

Capex Expected to Slip After Solid Rebound

Business investment in equipment is expected to slumped 1.2% on quarter in January-March (forecasts range from 2.0% to 0.2% drops) after marking the first rise in three quarters with a sharp 2.0% rebound in October-December, backed by continued solid growth in sales and profits.

Firms have been generally cautious about implementing their solid plans amid elevated costs and uncertainty over global growth, although capital investment is generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.

The latest industrial production data showed that shipments of capital goods excluding transport equipment – a key indicator of business investment in equipment in GDP data – fell 2.1% on quarter in January-March after rising 0.9% in October-December, falling 3.2% in July-September and partially rebounding 1.3% in April-June.

Net Exports Seen Slipping After Services-Led Rise

Net exports of goods and services – exports minus imports – is forecast to make a negative 0.4 percentage point contribution to the total domestic output (forecasts range from minus 0.9 to plus 0.1 points) after raising the GDP by 0.2 point in the previous quarter, which was supported by a one-off surge in services income (copyright royalties). Otherwise, external demand has been weak.

Japanese exports are forecast to mark their first quarterly decline in four quarters in the January-March quarter GDP, after rising 2.6% in October-December. Hit by sluggish domestic demand, imports are also expected to slip after rising 1.7% in the fourth quarter for the third straight rise. 

The BOJ’s index of real export values bounced back 3.4% on the month in March after falling 2.7% in February and sliding 3.9% in January. The index slumped 2.5% on quarter in the January-March period after increases of 0.3% in October-December, 0.5% in July-September and 1.7% in April-June, following a 2.9% dip in January-March 2023. The decrease in the first quarter of 2024 was led by a plunge in shipments of automobiles and auto parts cause by suspected vehicle production over the safety scandal as well as a continued slight drop in those of information technology goods and the first decline in three quarters for capital goods.

The number of visitors from other countries has recovered to pre-Covid levels and their spending is counted as Japanese exports of services. By contrast, exports of goods have been sluggish amid a weak tone in the European economy and despite signs of a pickup in China.  

Private Inventories Seen Up, Public Works Spending Rebound Expected

Private sector inventories are expected to provide a positive 0.1 percentage point contribution to the first quarter GDP (forecasts range from minus 0.1 point to plus 0.2 point), after trimming the fourth quarter GDP by 0.1 point.

Public works spending is forecast to post its first quarterly rise in three quarters, up 1.8% in January-March (forecasts range from 1.0% to 3.0% gains), backed by the stimulative effects of the fiscal 2023 budget, after falling 0.8% in October-December.