–Q3 GDP +0.2% Q/Q, +0.9% Annualized Vs. Median Forecasts of +0.2%, +0.6%
–External Demand’s Unexpected Dive Buoyed by Surprisingly Firmer Consumption Despite High Costs, Earthquake, Typhoons
–Domestic Demand Pushes Up GDP by 0.6 Point, Net Exports Slashes Growth by 0.4 Point
By Max Sato
(MaceNews) – Japan’s third quarter economic growth slowed to 0.2% on quarter, on pullbacks in business investment and public works spending, as expected, but an unexpected slip in external demand amid sapping Chinese demand and global uncertainties was offset by surprisingly solid consumer spending on vehicles amid high costs for necessities and stormy Q3 weather.
At a glance, the Q3 performance released by the Cabinet Office on Friday was not so bad as some economists had feared, with its annualized rate firmer at +0.9% vs. consensus +0.6%, but it was partly buoyed by the downward revision to the Q2 gross domestic product to +0.5% q/q from +0.7% and to +2.2% annualized from +2.9%.
The Q2 rebound was still led by private consumption, which accounts for about 55% of the GDP, and solid corporate capital investment. In the January-March quarter, the economy slumped 0.6% (annualized -2.4%) for the first contraction in two quarters, hit by suspended output at Toyota group factories over a safety test scandal that had a widespread impact beyond the auto industry.
Domestic demand added a strong 0.6 percentage point to total domestic output in Q3 (well above the consensus call of +0.1 point) after boosting the Q2 GDP by 0.7 point. External demand (exports minus imports) pushed down the overall GDP figure by 0.4 point, instead of the median forecast of +0.1 point, marking the third straight quarter of providing a negative contribution.
Only Modest Q4 GDP Rise Expected
Looking ahead, the economy in October-December is expected to show only modest growth as many households have been struggling to make ends meet amid high costs for food and fuels even though large firms are raising wages to cope with widespread labor shortages. Firms may increase investment in capacity in Q4 compared to Q3.
From a year earlier, the economy posted its first increase in three quarters, up 0.3% as projected by economists, after falling 1.0% previously.
Key components in percentage change on quarter except for private inventories and net exports, whose contributions are in percentage points. Figures in the previous quarter are in parentheses:
Domestic demand +0.6 point, 2nd straight rise (+0.8 point)
Private consumption +0.9%, 2nd straight rise after 4 drops (+0.7%)
Business investment -0.2%, 3rd drop in 5 quarters (+0.9%)
Public investment plus -0.9%, 4th drop in 5 quarters (+4.1%)
Private inventories +0.1 point, 2nd rise in 5 quarters (-0.1 point)
Net exports (external demand) -0.4 point, 4th drop in 5 quarters (-0.1 point)
The Cabinet Office estimates that in order for real GDP to hit the official forecast of 0.7% growth in fiscal 2024, the economy would have to grow 0.85% on quarter, or an annualized 3.5% in each of the two remaining quarters in the fiscal year ending next March. It may be too high a goal given still sluggish domestic consumption amid high costs, uncertainty over global growth and what many fear as an inflationary economic policy under President-elect Trump, who has promised to levy high tariffs on U.S. imports and boost growth with tax cuts.
October Trade Data Seen Sluggish
Japanese trade data for October due Nov. 20 is likely to show exports to China suffered their second straight year-on-year drop, hit by property market problems in the world’s second largest economy. Even exports to the resilient U.S. economy are set to post their third consecutive slip and shipments to the European Union remain weak, probably down for a seventh month in a row.
Japanese export values are forecast to show a rebound in October, up 3.0% (range -1.0% to +8.6%), after falling 1.7% in September for their first year-on-year drop in 10 months. An increase in semiconductor-producing equipment appears to be partly offset by drops in automobiles, mineral fuels and iron/steel. Import values are expected to mark their first decline in seven months, down 1.8% (range -6.5% to +4.4%), on crude oil, semiconductors and smartphones, following a 2.1% rise the previous month.
The trade balance is forecast to post a deficit of ¥132.2 billion (range a deficit of ¥360.4 billion to a surplus of ¥54.5 billion) for a fourth consecutive shortfall a revised ¥294.1 billion in deficit in September and compared with a ¥702.86 billion deficit in October 2023 and a record shortfall of ¥3,506.43 billion (¥3.51 trillion) in January 2023.
Japan’s economy grew a real 0.8% in fiscal 2023, which is now clearly below the official forecast of a 1.6% rise, after expanding 1.6% in fiscal 2022, which was slightly under the official projection of 1.7%. It followed a 3.1% gain in fiscal 2021 and decreases of 3.9% in fiscal 2020 and 0.8% in fiscal 2019.
In the latest GDP data, the unadjusted deflator rose 2.5% on year in Q3 after rising 3.1% in Q2 while the seasonally adjusted deflator gained 0.3% on quarter after surging 1.2%.
Japan Inflation Drifting Above BOJ’s 2% Target amid High Food, Energy Costs
In the Nov. 22 data, consumer inflation in Japan is expected to ease further to 2.2% in the core reading in October from 2.4% in September and 2.8% in August. The government’s temporary revival of utility subsidies for suppliers is lowering electricity and natural gas bill payments from September until November. Ruling party officials are considering resuming a similar scheme nearly next year to help ease the pain of many households hit by high costs for necessities for more than two years in light of the pandemic-era global supply chain breakdown and Russia’s war in Ukraine.
The year-on-year increase in the total CPI is forecast at 2.3%, also down from 2.5% in September. By contrast, underlying inflation measured by the core-core CPI (excluding fresh food and energy) is seen at 2.3%, up from 2.1% the previous month, as this relatively younger series is unaffected by energy prices.
BOJ on Course to Keep Unwinding Massive Cash Injections
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for at least three more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 as part of its gradual normalization process after more than a decade of large-scale easing.
The reflationary policy mix of massive cash injections into the financial system by the central bank, increased fiscal spending and promises of growth strategies was used by the late former prime minister Shinzo Abe, whose pet project was to rewrite Japan’s post-WWII pacifist constitution, to take his conservative Liberal Democratic Party back to power in a sweeping win in general elections in late 2012.
The LDP has been criticized by advocates for improving the livelihood of lower to middle income households since the inception of what they call a “misguided” massive printing of banknotes. A series of short-lived governments under the ruling coalition, which was pushed into a minority government in general elections about three weeks ago, have also come under fire for resorting to band-aid solutions of cash handouts and business subsidies, instead of formulating more effective programs to support women joining or going back to work and helping unemployment among the youth and those near retirement.