–Q1 GDP Annualized 2.0% Drop Vs. Median Forecast of 1.6% Contraction
–Economy Grows 1.2% in Fiscal 2023, Below Official Forecast of 1.6%
By Max Sato
(MaceNews) – Japan’s gross domestic product for the January-March quarter posted its first contraction in two quarters, down 0.5% on quarter, or an annualized 2.0%, 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, Cabinet Office data released Thursdayshowed.
The decline was slightly deeper than the median forecast of a 0.4% drop on quarter (forecasts ranged from 0.8% to 0.2% decreases), or a 1.6% fall annualized (3.3% to 0.7% drops).
The fourth quarter GDP’s slight 0.1% growth on quarter, or an annualized 0.4% gain, was now revised down to be flat in both measures. 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 downwardly revised fall in private-sector inventories. The initial estimate for the quarter reported in February was a 0.1% slip, or 0.4% contraction annualized.
From a year earlier, the economy fell 0.2% in January-March for the first drop in three years, as expected, following a 1.2% rise in October-December.
The economy grew a real 1.2% in fiscal 2023, below the official forecast of a 1.6% rise after expanding 1.6% (revised up from 1.5%) in fiscal 2022, which was slightly under the official projection of 1.7%. It followed a 2.8% gain in fiscal 2021 and decreases of 3.9% in fiscal 2020 and 0.8% in fiscal 2019.
Looking ahead, the economy in April-June is expected to show modest growth (about 1.7% annualized) 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 lows against the dollar, will cause a resumed spike in import costs at a time when the prices for some commodities are rising.
Domestic Demand Dips, Consumption Drops Faster Than Expected
Domestic demand trimmed the first quarter GDP by 0.2 percentage point, weaker than the median forecast of minus 0.1 point (forecasts ranged from a negative 0.3 point to a positive 0.5 point). It lowered fourth quarter growth by 0.2 point (revised down from a negative 0.1 point). A larger-than-expected rebound in public works spending was more than offset by a pullback in business investment and weaker-than-expected consumer spending.
Private consumption, which accounts for about 55% of GDP, fell 0.7% for a fourth straight quarterly decline, coming in much weaker than the median projection of a 0.2% fall (forecasts ranged from a 0.5% drop to a 0.4% gain) and following a 0.4% drop (revised down from a 0.3% dip) in the fourth quarter.
Consumption pushed down the first quarter GDP by 0.4 percentage point after making a negative 0.2-point contribution (revised down from minus 0.1 point) to the total domestic output in the previous quarter.
Capex Slips After Sharp Rebound
Business investment in equipment slumped 0.8% on quarter in January-March, firmer than the median forecast of a 1.2% drop (forecasts ranged from 2.0% to 0.2% drops). It was in payback for a sharp 1.8% rebound (revised down from a 2.0% jump) in October-December, the first rise in three quarters that was backed by continued solid growth in sales and profits.
Capex made a negative 0.4-point contribution to the first quarter GDP after providing a positive 0.3-point contribution the previous quarter.
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.
Net Exports Show Pullback
Japanese exports of goods and services posted their first quarterly decline in four quarters in the January-March quarter GDP, down 5.0%, after rising 2.8% in October-December. Imports also fell 3.4% after rising 1.8% in the previous quarter.
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 Support GDP, Public Works Spending Rebounds
Public works spending posted its first quarterly rise in three quarters, up 3.1% in January-March, backed by the stimulative effects of the fiscal 2023 budget, after falling 0.2% (revised up from a 0.8% drop) in October-December. It was much stronger than the median forecast of a 1.8% rise (forecasts ranged from 1.0% to 3.0% gains).
Public investment made a positive 0.2-point contribution to the first quarter GDP after lowering the total output by a slightly negative 0.0 point (revised up from minus 0.1 point) in the previous quarter.
Price Pressures Continue Easing Both on Year, Quarter
The unadjusted deflator rose 3.6% on year in January-March after rising 3.9% in October-December. The slower increase was due to a 2.8% rise in the import deflator following a 3.7% fall in the previous quarter. The pace of increase in the domestic demand deflator accelerated to 2.6% from 2.1%.
The seasonally adjusted deflator rose 0.6% on quarter after rising 0.7% in the third quarter, with the domestic demand deflator increasing 0.7% after rising 0.5%. The import deflator rose 1.5% after rising 2.4% in the prior quarter.
Consumer inflation continued easing in January but not so fast as expected because downward pressures from falling subsided energy costs, smaller processed food markups and hotel fee gains were partly offset by a surge in overseas package tour prices due to a statistical distortion.
The Cabinet Office said this distortion in the CPI data was adjusted when the GDP deflator was calculated for the January-March quarter.
The prices for overseas package tours jumped 62.9% on year in January, pushing up the CPI by 0.15 percentage point. Effective January this year, the Ministry of Internal Affairs and Communication resumed reflecting pricing data collected through its web scraping method for this category, which had been suspected since January 2021. This means the January 2024 data reflected three years of price changes. The pandemic prevented many Japanese from traveling freely to other countries for more than three years. After the government widely lifted its Covid public health restrictions in May 2023, the ministry resumed scraping prices for overseas trips packaged by Japanese travel agencies but waited until January 2024 to ensure data collection was smooth.