–Upward Revision to Business Investment from Slight Drop Smaller Than Expected; Domestic Demand Still Down
–Private Consumption Weaker, Private-Sector Inventories Revised Down
–Net Exports Rebound Intact, Public Works Fall Revied Down as Expected
–Q1 GDP Growth Seen Sluggish as Inflation Keeps Real Wages Down, Labor Shortages Linger
By Max Sato
The real GDP expanded 0.1% on quarter in the fourth quarter, or an annualized 0.4%, revised up from the initial estimate of a 0.1% slip (0.4% contraction annualized). It was weaker than the median forecast of 0.3% growth on quarter, or an annualized 1.3% rise. The forecasts by 10 economists ranged from increases of 0.2% to 0.4%, or an annualized pace of 0.7% to 1.8%.
Preliminary data released last month showed the economy unexpectedly posted a slight contraction in the fourth quarter, pushing the economy into a mild recession amid elevated costs for daily necessities and uncertainty over global growth. GDP slumped 0.8%, or an annualized 3.2% (revised from 3.3%), in the third quarter.
From a year earlier, the economy grew 1.2% in October-December, revised up from a preliminary 1.0% rise, for an 11th consecutive rise following a 1.6% (revised down from 1.7%) increase in July-September. The consensus forecast was a 1.5% rise.
Looking ahead, the economy in the first quarter of 2024 is expected to post only a slight increase close to zero as consumers remain frugal to cope with elevated living costs and some industries including hotels, restaurants and transport firms are losing business opportunities amid widespread labor shortages.
Consumption and production slumped in January amid suspended vehicle output over a safety test scandal. The economy also faces downside risks from Chinese slowdown, the Middle East conflict, and the effects of the powerful New Year’s Day earthquake in the northwestern region of Hokuriku that has reduced electronic parts supply and battered regional tourism.
The Cabinet Office estimates that in order for real GDP to hit the official forecast of 1.6% growth for fiscal 2023 ending this month, the economy will have to grow
0.78% (revised from 1.23%) on quarter, or an annualized 3.2% (revised from 5.0%) in January-March 2024.
There are heightened expectations that the Bank of Japan board may act sooner on March 18-19, instead of April 25-26, to lift the negative 0.1% short-term interest rate target to zero as part of its gradual process of unwinding large-scale monetary stimulus. Recent official comments point to a higher possibility of achieving stable 2% inflation and a reduced risk of falling back into deflation. Some major firms have already accepted demands for higher wages and better working conditions at an early stage of annual talks with unions ahead of March 13, when many large firms will respond to labor demands.
Domestic Demand Revised Up but Still Down; Consumption Remains Weak
Domestic demand trimmed the fourth quarter GDP by 0.1 percentage point, revised up from a negative 0.3 point in the initial reading but was much weaker than the median forecast of a positive 0.2 point (forecasts ranged from zero to plus 0.3 point). It was the second straight negative contribution after posting minus 0.8 point in the third quarter.
Private consumption, which accounts for about 55% of GDP, fell 0.3% on quarter in the fourth quarter, unexpectedly revised down from a preliminary 0.2% drop. It was the third consecutive quarterly decline. Consumption trimmed the GDP by an unrevised 0.1 point after making a negative 0.2-point contribution in the previous quarter.
Capex Revised Up but Not as Sharply as Expected
Business investment in equipment jumped 2.0% on quarter in October-December, a large upward revision from the initial reading of a 0.1% slip, after falling in the previous two quarters. It was lower than the median forecast of a 2.5% rise (forecasts ranged from 0.7% to 3.8% increases).
Capex made a positive 0.3-point contribution after providing a negative 0.0-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.
The revision is based on the results of a quarterly business survey by the Ministry of Finance released last week, which showed a large expansion in business investment backed by continued solid growth in sales and profits.
Net Export Rebound Unrevised
Net exports of goods and services — exports minus imports — made a positive 0.2 percentage point contribution to the total domestic output, as reported last month. In the previous quarter, the key measure of external demand provided zero (minus 0.0 point) contribution to the GDP.
Japanese exports of goods and services posted the third straight increase on quarter, up 2.6% in the October-December quarter GDP, after edging up 0.9% in September-July. Imports rose 1.7% after rising 1.0% in the third quarter and slumping 3.6% in the second 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 weak tones in the European and Chinese economies and despite solid demand for Japanese automobiles, particularly in the U.S. where economic growth has been stronger than expected.
Private Inventories Trim GDP, Public Works Drop Revised Down as Expected
Private sector inventories made a negative 0.1-point contribution to the fourth quarter GDP, revised down slightly from the initial estimate of minus 0.0 point, after pushing down the third quarter GDP by a downwardly revised 0.6 percentage point. The median forecast was zero (plus 0.0 point).
Public works spending marked a second straight quarterly decline in October-December. It was revised down to an as-expected 0.8% drop from a preliminary 0.7% decline. Forecast ranges from 1.5% to 0.3% decreases. It followed a 1.0% fall in July-September and a 2.2% rise in April-June.
The effects of earlier spending funded by the supplementary budget for fiscal 2022 that ended in March 2023 had run its course. Public investment made an unrevised zero contribution (minus 0.0 point) to the fourth quarter GDP after providing a negative 0.1-point contribution in the third quarter.
Price Pressures Slows in Q4, Largely as Seen in Preliminary Data
The unadjusted deflator rose 3.9% (revised from 3.8%) on year in October-December after surging 5.2% in July-September. The slower increase was due to a smaller 3.7% fall in the import deflator following a 7.4% slump in the previous quarter. The pace of increase in the domestic demand deflator decelerated to 2.1% (revised from 2.0%) from 2.5%.
The seasonally adjusted deflator edged up 0.4% on quarter after rising 0.8% in the third quarter, with the domestic demand deflator growing at the same pace of 0.4%, as seen previously. The import deflator rose 2.3% (revised from 2.2%) after rising 1.4% in the prior quarter.