Japan Q1 Annualized GDP Slump Revised Down to 2.9% from 1.8% Drop in Rare 2nd Revision as Public Works Spending Turns Much Weaker Than Estimated Earlier

–Domestic Demand Drops More Sharply, Consumption Remains Weak, Capex Down

By Max Sato

(MaceNews) – In a rare second revision, Japan’s gross domestic product for the January-March quarter confirmed the economy posted its first contraction in two quarters, down 0.7% on quarter versus a 0.5% drop in earlier estimates, and the annualized decline was revised down sharply to 2.9% — all from much weaker public works spending — after an upward revision to 1.8% from the initial estimate of 2.0%, Cabinet Office data released Mondayshowed.

The Cabinet Office based the latest estimate on revisions to recent data of construction investment. It had warned that this could affect the GDP components of private housing, private capital investment and public works spending, prompting some economists to predict a downward revision to the GDP.

Domestic demand trimmed the first quarter GDP by 0.4 percentage point, revised down from a negative 0.1 point in the first revision, after it lowered the fourth quarter GDP by a revised 0.2 point. Public works spending, which now showed a 1.9% fall (a negative 0.1-point contribution), instead of the previous estimate of a 3.0% rebound (positive 0.2 point), added to the downward pressure from a pullback in business investment and weak consumer spending.

Net exports of goods and services — exports minus imports — made a negative 0.4 percentage point contribution to the total domestic output, as seen in the first revision.

The bigger picture is the same: Suspended output at Toyota group firms over a safety test scandal in the first two months of the year triggered a widespread slump beyond the auto industry, hurting consumption and business investment, while net exports declined in payback for a temporary service income surge in the previous quarter.

Private consumption, which accounts for about 55% of GDP, fell 0.7% for a fourth straight quarterly decline, unrevised from the previous estimate, following a 0.4% fall in the fourth quarter. Consumption pushed down the first quarter GDP by an unrevised 0.4 percentage point after making a negative 0.2-point contribution to the total domestic output in the previous quarter.

Business investment in equipment fell an unrevised 0.4% on quarter in January-March in payback for a sharp 2.0% rebound in October-December, the first rise in three quarters that was backed by continued solid growth in sales and profits. Capex made a negative 0.1-point contribution to the first quarter GDP, as seen in the previous reading, after providing a positive 0.3-point contribution the previous quarter.

The economy narrowly averted a second straight contraction in the final quarter of 2023. In the latest estimate, the fourth quarter showed zero growth on quarter, or an annualized 0.1% increase, revised down from the previous estimate of a 0.1% rise on quarter (annualized 0.4%). In October-December, a solid rebound in business investment and a rise in net exports due to a temporary surge in services income (copyright royalties) were offset by declines in consumption and public works as well as a slight fall in private-sector inventories.

From a year earlier, the economy fell 0.7% in January-March for the first drop in three years, compared to a 0.1% drop in the first revision and a preliminary 0.2% decline, following a revised 1.0% rise in October-December.

Looking ahead, the economy in April-June is expected to show modest growth of about 2% annualized as auto production resumed in March but more revelations of false safety test records in June, this time at Toyota Motor itself, instead of its subsidiaries, are clouding the growth outlook for coming months. In addition, 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 lows against the dollar, will cause a resumed spike in import costs at a time when transport and labor costs are rising together with some commodities.

The Cabinet Office estimates that in order for real GDP to hit the official forecast of 1.3% growth in fiscal 2024, the economy will have to grow 0.83% on quarter, or an annualized 3.4% in each quarter of the fiscal year that began in April, which is above Japan’s potential growth rate and thus appears to be difficult to achieve.

The economy grew a real 1.0% in fiscal 2023 (revised down from 1.2%), below the official forecast of a 1.6% rise, after expanding 1.7% in fiscal 2022 in line with the official projection of 1.7%. It followed a 3.0% gain in fiscal 2021 and decreases of 3.9% in fiscal 2020 and 0.8% in fiscal 2019.