–After Annual Revisions, Economy Has Now Slipped Every Other Quarter Since Q1 2021
–Consumption Slower but Resilient Despite Covid Spike at Peak of Summer
–Capex Demand for FY22 Solid Amid Digital, Green Transformations
–Q4 GDP May Rebound on Fiscal Support but Global Uncertainties Remain
By Max Sato
(MaceNews) – Japan’s gradual economic recovery led by resilient consumption and solid business investment was dented by a surge in imports in the July-September quarter, but the surprise contraction was slightly smaller than initially estimated, thanks to upward revisions to private sector inventories and net exports, Cabinet Office data released Thursday showed.
The real gross domestic product contracted 0.2% on quarter, or an annualized 0.8%, in the third quarter, revised up from the initial estimate of a 0.3% contraction, or an annualized 1.2% decline. The revision was firmer than the Mace News median forecast of a 0.3% drop or an annualized 1.0% slump.
As seen in the preliminary GDP data for July-September released last month, a surge in imports led by high costs and easing supply bottlenecks slashed net exports in the third quarter, dampening the effects of resilient business investment and consumer spending.
Annual updates on past data led to only a minor change to the April-June GDP growth (up an unrevised 1.1% on quarter, or an annualized 4.5% versus 4.6%) but January-March GDP now shows a contraction, down 0.5% on quarter, or an annualized 1.8%, instead of its previous estimate of modest growth of 0.1% rise, or an annualized 0.2%. As a result, Japan’s economy has contracted every other quarter since the beginning of 2021.
The Cabinet Office on Thursday estimated that the GDP would have to grow
1.04% on quarter, or an annualized 4.2%, in each of the October-December and January-March quarters for the economy to hit the official forecast of 2.0% growth for fiscal 2022.
The economy grew a real 2.5% (revised up from a 2.3% rise) in fiscal 2021 that ended in March this year, still missing the official economic forecast of 2.6% growth. It was the first increase in three years after shrinking 4.1% (revised up from a 4.6% drop) in fiscal 2020 and falling 0.8% (revised up from a 0.9% dip) in fiscal 2019 and edging up 0.2% (revised down from 0.3%) in fiscal 2018.
From a year earlier, the economy rose 1.5% (revised down from 1.8%) in July-September, posting the sixth consecutive rise following increases of 1.6% (revised down from 1.7%) in April-June, 0.4% (revised down from 0.6%) in January-March, 0.8% (revised up from 0.5%) in October-December and 1.8% (revised up from 1.2%) in July-September last year.
Looking ahead, the economy may rebound in the October-December quarter but its outlook remains uncertain as industrial production posted the second straight monthly drop in October, hit by slowing global demand, while the cost of living is rising fast and real wages are falling, eroding the purchasing power of many households. The eighth wave of the pandemic is also emerging in Japan after the previous wave led to record numbers of infections from late July to late August.
On average, 35 economists polled by the Japan Center for Economic Research from Oct. 26 to Nov. 2 forecast the GDP would grow 2.14% at an annualized pace in the October-December quarter before slowing to just over 1% in each quarter of 2023, according to the center’s ESP Forecast released on Nov. 10 ahead of the preliminary Q3 GDP data. Their forecasts were based on their average estimate that the economy had grown 1.21% in July-September, much stronger than the actual initial figure of a 1.2% contraction.
Slower Consumption Growth
Private consumption, which accounts for about 55% of GDP, posted a 0.1% rise on quarter in the third quarter, revised down from an initial 0.3% increase, following a 1.7% surge (revised up from a 1.2% gain) in the second quarter and a 1.0% drop (revised down from a 0.3% rise) in the first quarter and a 3.2% jump (revised up from a 2.5% climb) in the final quarter of 2021. It pushed up the GDP by a slight 0.1 percentage point (unrevised) after making a positive 0.9-point contribution (revised from plus 0.7 point) to the total domestic output in the previous quarter.
The seventh wave of the pandemic in Japan had subsided by early September but for the whole of the quarter, some people including seniors were cautious about eating out or traveling, although the government refrained from urging strict public health rules. Employment conditions improved but the average household income slumped in real terms amid rising costs for daily necessities.
Solid Capex Growth Unrevised
The quarter-on-quarter growth in business investment in equipment was an unrevised 1.5% increase after a 2.0% rebound (revised down from a 2.4% rise) in April-June. The median forecast was a slight upward revision to a 1.6% gain, based on the results of a quarterly business survey conducted by the Ministry of Finance released last week.
Capex pushed up the GDP by an unrevised 0.2 percentage point after providing a positive 0.3-point contribution (revised from plus 0.4 point) in the previous quarter. The Bank of Japan’s quarterly Tankan survey for September showed companies revised up their capex plans for fiscal 2022 ending next March. The December Tankan due on Dec. 14 is expected to show a slight downward revision to plans among manufacturers (still 20% above fiscal 2021 levels) and an upward revision to those among non-manufacturers.
The demand-side survey by the MOF showed that combined capital investment by non-financial Japanese companies rose 9.8% on year in the July-September, quarter, accelerating from a 4.6% increase in April-June. On quarter, combined capital outlays gained a seasonally adjusted 2.4% after rising 4.1% in the previous quarter.
The capex figures in the preliminary GDP calculation are based solely on supply
side data.
Some capital investment plans are being carried over from fiscal 2021, when the economy was hit by the wintertime spike in Covid cases and supply delays were aggravated by the Ukraine war. Capex is generally supported by demand for automation, government-led digital transformation and emission control.
External Demand Slumps as Imports Surge
Net exports of goods and services — exports minus imports — made a negative 0.6 percentage point (revised up slightly from a negative 0.7 point) contribution to the total domestic output in the third quarter, which was firmer that the median forecast of minus 0.7 point. In the previous quarter, the key measure of external demand raised the GDP by 0.1 point (revised from plus 0.2 point) after lowering it by 0.5 point in January-March.
Exports of goods and services rose a solid 2.1% (revised up from 1.9%) on quarter in July-September, posting the fourth straight quarterly gain after rising 1.5% (revised down from 1.8%) in April-June.
Imports soared an unrevised 5.2% on rising prices of various goods after rising 1.0% (revised from 0.8%) in April-June, when the pace of imports slowed after the government had bought more Covid-19 vaccines from the U.S. and Europe in the previous quarters. The lifting of China’s lockdown of Shanghai in the second quarter led to a pickup in shipments to and from the key port city in the third quarter. Japan’s service payments to other countries also increased in July-September, pushing up total imports.
The BOJ’s real export index rose a seasonally adjusted 3.0% on quarter in July-September after slumping 3.3% in April-June and rising 2.3% in January-March. The increase was led by a sharp rebound in the shipments of automobiles and auto parts and a continued rise in capital goods shipments, which eased the impact of lower demand for computers, semiconductors and other information technology goods.
Private Inventories Revised Up, Public Works Revised Down
Private sector inventories provided a positive 0.1 percentage point contribution to the July-September GDP, revised up from a negative 0.1 point, after pushing down the Q2 GDP by 0.3 point (revised from 0.2 point).
Public works spending expanded 0.9% (revised down from an initial 1.2%) on quarter in the third quarter after marking the first quarter-on-quarter rise in five quarters, up 0.7% (revised down from 1.0%), in April-June, when the government implemented projects included in the supplementary budget from the previous 2021 fiscal year. The median forecast was an upward revision to a 1.5% increase.
Public investment made zero contribution to the total domestic output in both the third and second quarters after trimming 0.2 point off the first-quarter output.