–Japan’s Economy Posts 1st Q/Q Drop in 4 Quarters; Q2 Growth Revised Up
–Consumption Marks 4th Straight Q/Q Rise Despite Spike in New Covid Cases
–Capex Demand for FY22 Solid Amid Digitization, Green Transformations
–Q4 GDP May Rebound on Fiscal Support but Global Uncertainties Remain
–Economic Minister Goto: Japan Gradual Pickup Intact Despite Q3 Dip
By Max Sato
(MaceNews) – Japan’s gross domestic product for the July-September quarter unexpectedly slumped 0.3%, or an annualized 1.2% for the first quarter-on-quarter contraction as a surge in imports led by high costs and easing supply bottlenecks slashed net exports more sharply than expected, dampening the effects of resilient business investment and consumer spending, Cabinet Office data released Tuesday showed.
The preliminary data came in much weaker than the Mace News median economist forecast of 0.4% growth (forecasts ranged from 0.1% to 0.6%), or an annualized 1.6% gain (0.5% to 2.4%).
The third-quarter contraction followed a solid 1.1% expansion (revised up from a 0.9% rise), or an annualized 4.6% gain (revised up from a 3.5% increase) in April-June, when pent-up demand for dining out and traveling under eased public health restrictions boosted consumption and business investment was stronger than expected, mitigating the effects of supply constrains that were exacerbated by China’s two-month lockdown of Shanghai through the end of May.
“Capital investment continued to grow, reflecting good corporate demand, and private consumption maintained growth on the quarter as the normalization of economic and social activities progressed despite the spread of Covid infections in the summer,” Economic and Fiscal Policy Minister Shigeyuki Goto said in a statement.
“There is no change to the status that the economy is picking up gradually, mainly backed by domestic demand,” he said. “The economy is expected to continue picking up, supported by the effects of various economic policy measures, as we move forward in the new stage of living with the pandemic.”
But the minister also warned about rising prices, falling real household incomes and concerns over a global recession amid credit tightening by central banks in North America and Europe.
From a year earlier, the economy rose 1.8% in July-September, posting the sixth consecutive rise following increases of 1.7% (revised up from 1.6%) in April-June, 0.6% in January-March, 0.5% in October-December, 1.2% in July-September last year.
The real GDP amount fell to Y543.6 trillion in the July-September quarter from an upwardly revised Y545.3 trillion in the April-June quarter, which now surpassed the Y543.8 trillion recorded in the January-March period of 2020, when the GDP grew 0.6% on quarter before the outbreak of the pandemic triggered a 7.9% slump in the following quarter. The second-quarter GDP was the largest since Y540.7 trillion in October-December 2019, when the economy contracted 2.9%.
Consumer Spending Slows After Q2 Jump
Private consumption, which accounts for about 55% of GDP, rose 0.3% on quarter in the third quarter, coming in slightly firmer than the median projection of a 0.2% increase (forecasts ranged from a 0.2% drop to a 0.6% rise) and following an unrevised 1.2% surge in the second quarter and a 0.3% rise in the first quarter and a 2.5% jump in the final quarter of 2021.
It pushed up the GDP by a slight 0.1 percentage point after making a positive 0.7-point (revised up from 0.6 point) contribution 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.
Capex Solid but Slower Than Expected
Business investment in equipment rose 1.5% on quarter in July-September, weaker than the median forecast of a 2.0% rise (forecasts ranged from 1.5% to +4.0% gains) after growing 2.4% in April-June (revised up from 2.0%) and slipping 0.1% in January-March.
Capex pushed up the GDP by 0.2 percentage point in the third quarter after providing a positive 0.4-point contribution (revised up from plus 0.3 point) in the previous quarter, reflecting the results of the Bank of Japan’s quarterly Tankan survey for September, which showed companies revised up their capex plans for fiscal 2022 ending next March.
Some capital investment plans are being carried over from fiscal 2021 that ended in March, 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 0.7 percentage point contribution to the total domestic output in the third quarter, coming in much weaker than the median forecast of a negative 0.3-point contribution (forecasts ranged from a 0.5%-point drop to a 0.1-point rise).
In the previous quarter, the key measure of external demand raised the GDP by 0.2 point (revised up from plus 0.1 point) after lowering it by 0.5 point for a second straight negative contribution in January-March (-0.0 point in October-December).
Exports of goods and services rose a solid 1.9% on quarter in July-September, posting the fourth straight quarterly gain after rising 1.8% (revised up from a 0.9% rise) in April-June.
Imports soared 5.2% on rising prices of various goods after rising 0.8% (revised up from a 0.6% rise) April-June, when the pace of imports slowed after the government had bought more Covid-19 vaccines from the US 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 Slip, Public Works Up
Private sector inventories provided a negative 0.1 percentage point contribution to the July-September GDP, compared to the median forecast of a zero contribution (forecasts ranged from a 0.2-point drop to a 0.1-point rise) after pushing down the Q2 GDP by 0.2 point (revised up from minus 0.3 point). Companies appeared to have used built-up inventories to meet shipment needs.
On the upside, public works spending expanded 1.2% on quarter in the third quarter after marking the first quarter-on-quarter rise in six quarters, up 1.0%, in April-June, when the government implemented projects included in the supplementary budget from the previous 2021 fiscal year. The median forecast for public investment was a 1.3% rise (forecasts ranged from 0.5% to 2.5% increases).
Public investment raised the third-quarter total domestic output by 0.1 percentage point after making a positive 0.1-point contribution (revised up from zero) to the GDP in the second quarter and trimming 0.2 point off the first-quarter output. Earlier, the government was focused more on purchasing Covid-19 vaccines, which falls into the public consumption category.
Q4 GDP May Rebound but Uncertainties Linger
On average, 36 economists polled by the Japan Center for Economic Research from Sept. 27 to Oct. 4 forecast the GDP would grow 2.18% at an annualized pace in the October-December quarter (based on their assumption that it rose 1.21% in July-September) before slowing to just over 1% in each quarter of 2023, according to the center’s ESP Forecast released on Oct. 11.
The Cabinet Office on Tuesday estimated that the GDP would have to grow 0.79% on quarter, or an annualized 3.2%, 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 2.3% (unrevised) in fiscal 2021 that ended in March this year, missing the official economic forecast of 2.6% growth. It was the first increase in three years after shrinking 4.6% in fiscal 2020 and 0.9% in fiscal 2019 and edging up 0.3% in fiscal 2018.