–Consumer Spending on Services, Rebound in Business Investment Lead Economic Growth as in Preliminary Data
–Net Exports Down Amid Slowing Global Demand
–Q4’s Slight Contraction Revised Up to Slight Growth, Making Q1 GDP 2nd Straight Quarterly Rise
–Q2 GDP Seen Supported by Consumption Without Covid Restrictions but High Prices Remain Headwind
By Max Sato
(MaceNews) – Japan’s solid economic growth led by resilient consumer spending in the January-March quarter was revised up sharply by an unexpected surge in private-sector inventories, which topped resilient consumer spending as the largest factor to lead the growth, Cabinet Office data released Thursday showed.
A rebound in business investment was revised up as largely expected while public works spending was less robust than initially estimated, but their positive contributions to overall output were unrevised.
Real gross domestic product grew 0.7% on quarter in the first quarter of 2023, revised up from the initial estimate of a 0.4% rise, with its annualized growth rate revised up to 2.7% from 1.6%. The revised growth was well above the median economist forecast of a 0.5% rise or an annualized 1.9% gain. The forecasts ranged from increases of 0.4% to 0.6%, or an annualized pace of 1.5% to 2.3%.
The economy posted a second straight quarterly growth as the fourth quarter’s slight contraction (-0.01%) on quarter, or an annualized 0.1%, has been revised up to a slight 0.1% rise, or an annualized 0.4% gain, following a downwardly revised 0.4% drop (an annualized 1.5% fall) in the third quarter.
The annualized 2.7% growth in the first quarter is the second highest among the Group of Seven major economies after Canada’s robust 3.1% and well above the modest 1.3% increase in the U.S.
From a year earlier, the Japanese economy rose 1.9% (revised from a 1.3% rise) in January-March, posting the eighth consecutive rise following a 0.4% gain in October-December.
Japanese policymakers believe the domestic economy still needs fiscal and monetary policy support as its output gap has been in negative territory for over three years, although it has narrowed to minus 0.9 percentage point in the first quarter of 2023 from minus 1.2 points in the previous quarter and a wide gap of negative 9.1 points in the second quarter of 2020.
Looking ahead, economic growth in April-June is expected to remain solid as consumer spending is propped up by eased Covid rules and pent-up demand for traveling and dining out, easing the impact of sluggish exports amid slower global demand.
But households continue to face rising costs for food and other daily necessities as suppliers are trying to fully reflect last year’s spike in energy and commodities prices. The key is whether small businesses, which employ 70% of the workforce, can afford to raise wages at the same fast pace as major firms plan to do in fiscal 2023 that began in April.
The Cabinet Office estimates that the real GDP would have to grow at about 0.4% on quarter, or an annualized 1.6%, in each of the remaining quarters through January-March 2024 for the economy to hit the official forecast of 1.5% growth for fiscal 2023.
The economy grew a real 1.4% (revised up from 1.2%) in fiscal 2022, below the official forecast of a 1.7% rise. It followed a 2.6% gain in fiscal 2021, which matched the official projection, decreases of 4.1% in fiscal 2020 and 0.8% in fiscal 2019, and a 0.2% rise in fiscal 2018.
Solid Consumption Revised Down Slightly
Domestic demand was led by consumer spending amid improving sentiment and faster deliveries of automobiles, easing the effects of a drop in external demand, down amid weak exports to Asia.
Private consumption, which accounts for about 55% of GDP, rose 0.5% (revised down slightly from an initial 0.6%) on quarter in the first quarter after rising 0.2% in the fourth quarter of 2022, edging up 0.1% (revised up from being unchanged) in the third quarter and surging 1.7% in the second quarter. Consumption pushed up the GDP by an unrevised 0.3 percentage point after making a positive 0.1 percentage contribution to the total domestic output in the previous quarter.
In the absence of strict public health rules for the first time in three years, many households continued spending more on eating out and traveling, taking advantage of the government’s discount program aimed at shoring up the Covid-hit tourism industry.
Capex Rebound Revised Up After MOF Survey
Business investment in equipment rebounded in January-March, up 1.4% (revised up from a 0.9% rise) on quarter, after falling 0.6% (revised from a 0.7% fall) in October-December and rising 1.5% in July-September. Capex raised the GDP by 0.2 percentage point, unrevised from the initial reading, in the first quarter after providing a negative 0.1- point contribution the previous quarter.
Based on the results of a quarterly business survey conducted by the Ministry of Finance released last week, the median economist forecast was an upward revision to a 1.3% increase (forecasts ranged from 0.9% to 1.7% gains).
The demand-side survey by the MOF showed that combined capital investment by non-financial Japanese companies rose 11.0% on year in the January-March quarter, up from increases of 7.7% October-December. On quarter, combined capital outlays gained a seasonally adjusted 2.3% after rising 0.8% in the previous quarter. The capex figures in the preliminary GDP calculation are based solely on supply side data.
Capital investment is generally supported by demand for automation amid labor shortages in some sectors as well as government-led digital transformation and emission control.
External Demand Weak on Slowing Global Demand
External demand was weak in January-March. Net exports of goods and services — exports minus imports — made a negative, unrevised 0.3 percentage point contribution to the total domestic output in the first quarter after pushing up the GDP by 0.4 point in the previous quarter.
Japanese exports to posted their first drop in six quarters in the January-March GDP data while imports marked their second consecutive fall after a surge in July-September led by service payments.
The number of visitors from other countries has continued to pick up since the government eased its Covid border control rules in October, leading to higher spending by foreign visitors, which is counted among exports, but shipments of goods to other economies have been sluggish due to a global slowdown.
Private Inventories Revised Up Sharply, Public Works Spending Revised Down
Private sector inventories provided a positive 0.4-point contribution to the first quarter GDP, revised up sharply from the preliminary reading of plus 0.1 point, after pushing down the fourth quarter GDP by a revised 0.4 percentage point. It was the first positive contribution in three quarters.
Companies tend to reduce inventories of in-progress products in January-March but the degree of reduction was less than usual, which led to a large increase in overall private inventories when figures are adjusted for seasonal factors, a Cabinet Office official said. It is not clear from the GDP data as to whether firms were building up inventories to meet higher demand for finished goods, he said.
Public works spending posted its fourth straight increase, up 1.5% (revised down from a 2.4% rise) on the quarter in January-March, following no growth (revised down from a 0.2% rise) in October-December. The median forecast was a smaller downward revision to a 2.1% rise. Public investment raised the first quarter total domestic output by an unrevised 0.1 percentage point after making zero contribution to the GDP in the previous three quarters.