–Updates with latest consumption data in paras 6-7, government measures in para 17, ESP Forecast in paras 18-19, Watchers’ survey at bottom
— Consumption, Capex, Net Export Gains Behind Expected Solid Q4 Growth
— Q1 GDP Face Downside Risks As Omicron-Led Covid Spike Hurts Sentiment
By Max Sato
(MaceNews) – Japan’s gross domestic product for the October-December quarter is forecast by economists to post a 1.4% rebound on quarter, or an annualized 5.8% rise, as easing parts supply constraints supported auto exports and consumers dined out and traveled before an Omicron-led spike in new cases promoted the government to resume anti-Covid restrictions in January.
The median forecast for Q4 GDP is based on projections by 10 economists compiled by Mace News, which ranged from +1.0% to +1.8% on quarter, or an annualized +4.0% to +7.4%.
The Cabinet Office will release preliminary GDP data for the final quarter of 2021 at 0850 JST Tuesday, Feb. 15 (2350 GMT/1850 EST Monday, Feb. 14).
The expected expansion in the fourth quarter would be the first quarter-on-quarter rise in two quarters after the economy contracted 0.9%, or an annualized 3.6%, in July-September, when a Covid resurgence triggered by the Delta variant dampened shopping and dining out while supply chain disruptions hampered business investment.
Consumption Seen Up, Capex Modest
The median forecast for private consumption, which accounts for about 55% of GDP, is for a 2.3% rebound on quarter in Q4 (ranging from +1.5% to +2.8%) following a 1.3% drop in Q3.
Japan’s household spending suffered a slight 0.2% drop from a year earlier in December as demand for home entertainment devices and groceries tapered off, but a gradual pickup in dining out and traveling led to a 4.6% quarter-on-quarter rebound in spending in October-December, data released Tuesday by the Ministry of Internal Affairs and Communications showed.
In addition, the Bank of Japan’s supply-side Consumption Activity Index posted the first rise in four quarters in the final three months of 2021, up a real 4.4% on a seasonally adjusted basis following a 0.6% drop in July-September.
Business investment in equipment is expected to show a modest rebound in Q4, up 0.8% on quarter, recovering only partially from a sharp 2.3% slump in Q3. The forecasts range from a 0.8% decline to a 1.8% rise.
Japanese firms appear to remain cautious on implementing their solid capital investment plans amid uncertainty over the negative impact of the pandemic. However, there is strong underlying demand for upgrading computer software for digiting and automating operations amid chronic labor shortages for some industries and the government-led drive to modernized the economy.
External Demand To Support GDP
The median forecast for net exports of goods and services – exports minus imports – is for a positive 0.2 percentage point contribution to total domestic output (ranging from zero to +0.5 percentage point) in the final quarter of 2021. In Q3, the key measure of external demand made zero contribution to the GDP.
Net exports appear to have been buoyed by the recent pickup in automobile production and shipments, thanks to eased delays in parts supply from Southeast Asia, and by an expected drop in imports in Q4, when surging oil and gas prices slowed Japanese purchases.
In its monthly report for January, the government maintained its assessment of exports as being “largely flat” after downgrading it for the second month in a row in November. Shipments of vehicles and parts are improving while those of capital goods are showing. Exports of smartphone parts and base stations for the 5G telecommunications standard are expected to increase.
The Bank of Japan’s real export index dipped a seasonally adjusted 1.2% on month in December for the first drop in two months, led by a sharp drop in capital goods shipments and despite a continuing pickup in auto exports. It followed a 9.1% surge in November and a 0.5% fall in October. The index sagged 0.9% in the October-December quarter, the second straight quarterly decline after falling 2.9% in July-September.
In other details, private sector inventories are expected to have provided zero contribution to the October-December GDP (forecasts ranged from -0.2 to +0.3 percentage point), after pushing up the July-September GDP by 0.1 point. Four of the 10 economists expect a slight rise based on a faster buildup in manufacturers’ inventories in Q4 from Q3 while two forecast a slight drop, assuming some inventories were drawn down to meet higher shipments amid reopening demand.
On the downside, public works spending is expected to mark a fourth consecutive quarter-on-quarter decline, as the government has focused more on providing financial supports to individuals and businesses hit by the pandemic as well as importing Covid-19 vaccines. The median forecast for public investment is a 3.0% slump on quarter in Q4 (forecasts ranged from -4.0% to -0.4%) after a 2.0% drop in Q3.
Downside Risks To Q1 GDP
The relentless spread of the pandemic in the new year has prompted the government to expand strict restrictions on social and economic activities to 35 of Japan’s 47 prefectures. It is expected to extend the measures, short of a state of emergency, for 13 prefectures including Tokyo that are set to expire on Feb. 13 until March 5. The restrictions on most of the 22 other jurisdictions are due to end on Feb. 20.
Economists have sharply revised down their forecasts for the January-March economic performance, with some looking at a possible contraction.
On average, 36 economists polled by the Japan Center for Economic Research from Jan. 28 to Feb. 4 forecast GDP would grow just 1.70% at an annualized rate in the first quarter of 2022, down from 5.07% projected in the previous ESP Forecast survey from Dec. 24 to Jan. 7.
From mid-December to mid-January, consumer spending seemed to have hovered around the average-year levels seen from 2017 through 2019, according to private-sector data. Retail stores reported higher sales during the year-end and new year shopping season, compared to a year earlier.
During that period, people generally braved the Omicron scare and dined out more and resumed visits to their hometowns for the traditional new year’s celebrations after restraining a year before, supporting private consumption.
Omicron Hurting Sentiment
But toward the end of January and into February, Japan saw a rapid surge in new Covid cases, discouraging people from going out and forcing some factories and retail stores to suspend operations as employers fell sick or were required to quarantine after coming in close contact with people who tested positive.
The Cabinet Office’s Consumer Confidence Survey of households with two or more people, which was conducted on Jan. 15, showed that sentiment plunged in all key areas.
The Consumer Confidence index fell 2.4 points to a five-month low of 36.7 in January on a seasonally adjusted basis, marking the second straight monthly decline after dipping 0.1 point to 39.1 in December. This led the Cabinet Office to downgrade its assessment that consumer sentiment is “pausing” from its previous view that “signs of a pickup continue.”
Consumers were more pessimistic about all four key aspects that affect their sentiment – overall economic well-being, income gains, job prospects and whether it would be a good time to buy durable goods over the next six months.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Jan. 25 to Jan. 31, showed that sentiment took another nosedive, prompting the agency to downgrade its view based on the survey, saying the pickup has a weaker tone.
The Watchers’ sentiment “direction” index for Japan’s current economic climate plunged by 19.6 points to a five-month low of 37.9 on a seasonally adjusted basis in January, hitting the lowest since 34.9 in August, when the government
expanded areas under strict restrictions as the Delta variant triggered a spike in Covid cases.
It was the first drop in five months after the index showing the direction of the current economic conditions edged up 0.7 point to a 16-year high of 57.5 in December (the highest since 57.7 in December 2005). The Cabinet Office conducted an annual update on seasonal adjustments to past figures.
The Watchers’ outlook “direction” index, which shows sentiment about the situation two to three months ahead, slid 7.8 points to 42.5 in January, the lowest since 36.9 in December 2020. It marked the third straight monthly decline after falling 2.9 points to 50.3 in December.
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Contact this reporter: max@macenews.com
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