–Sharp Drop in Private Inventories, Capex Pullback Behind Lackluster Q4 GDP
–Consumption Resilient on Eased Covid Rules, Travel Subsidies Despite Falling Real Wages
–Q4 Net Exports Rebound After Q3 Slump Caused by Surge in Service Payments
–Q1 GDP Seen Supported by Consumption Amid Weaker Exports; Rising Costs Cause for Concern
By Max Sato
(MaceNews) – The modest rebound in Japan’s economic activity in the October-December quarter was unexpectedly revised down to zero growth as the pickup in consumer spending was slower than initially estimated and a large drop in private-sector inventories pushed down domestic demand, mitigating the impact of firmer-than-expected external demand, Cabinet Office data released Thursday showed.
The real gross domestic product was flat (+0.0%) on quarter in the final quarter of 2022, revised down from the initial estimate of a 0.2% rise, with its annualized growth rate revised down sharply to 0.1% from 0.6%. The revision was much weaker than the Mace News median forecast of a 0.2% rise or an annualized 0.8% gain. The forecasts ranged from increases of 0.1% to 0.4%, or an annualized pace of 0.2% to 1.5%.
The flat performance in the fourth quarter GDP followed a contraction by an unrevised 0.3% on quarter, or an annualized 1.1% (revised down from 1.0%) in the third quarter. The rebound lacked strength due to a sharp reduction in private sector inventories. Eased Covid rules and travel subsidies supported consumption in October-December while net exports rose after a one-time surge in service imports caused an unexpected contraction in July-September.
Looking ahead, economic growth in January-March may remain sluggish in the face of slowing global demand following last year’s aggressive monetary tightening by some central banks aimed at bringing high inflation back to target.
Sentiment Picking Up but Rising Costs a Damper
Domestic demand is likely to be supported by consumer spending on goods and services as the economy continues to reopen, but the purchasing power of many households has been reduced by rising costs for daily necessities and falling real wages.
The monthly Economy Watchers Survey, which was conducted by the Cabinet Office from Feb. 25 to Feb. 28 and released Wednesday, indicated that confidence picked up sharply in February as the economy continued reopening and anti-Covid public health rules were scheduled to be eased further in March. The outlook was mixed, however, as some firms found it hard to fully pass higher producer costs onto customers.
The Watchers’ sentiment index showing the direction of Japan’s current economic climate posted its first monthly rise in four months, surging 3.5 points to an eight-month high of 52.0 in February, on a seasonally adjusted basis, from a five-month low of 48.5 in January. The index popped above the key 50 line for the first time since it rose to 50.8 in October, but it is still below the 16-year high of 58.3 hit in December 2021.
The Watchers’ outlook index, which shows sentiment in two to three months, marked its third consecutive increase, rising 1.5 points to a nine-month high of 50.8 in February after jumping 2.5 points to 49.3 in January.
The Cabinet Office estimates that the GDP would have to grow at a high pace of 2.06% on quarter, or an annualized 8.5%, in the January-March quarter for the economy to hit the official forecast of 1.7% growth for fiscal 2022, which seems unlikely given quarterly growth has been limited to just above 1% in the past two years.
The economy grew a real 2.6% in fiscal 2021 that ended in March 2022, just in line with the official economic forecast of 2.6% growth. It was the first increase in three years after shrinking 4.1% in fiscal 2020 and 0.8% in fiscal 2019 and edging up 0.2% in fiscal 2018.
Solid Consumption Growth Unexpectedly Revised Down
Private consumption, which accounts for about 55% of GDP, rose 0.3% (revised down from an initial 0.5%) on quarter in the fourth quarter after being unchanged in the third quarter and rising a downwardly revised 1.6% in the second quarter. Consumption pushed up the GDP by 0.2 percentage point (revised down from 0.3 point) after making zero contribution to the total domestic output in the previous quarter.
In the absence of strict public health rules for the first time in three years, many households continued spending on domestic travel, using the government’s discount program launched in October, while some people were cautious about stepping out as the numbers of coronavirus infections and deaths surged toward yearend in the eighth wave of the pandemic in Japan.
No Revision to Capex Drop
Business investment in equipment marked its first drop in three quarters in October-December, down an unrevised 0.5% on quarter, following solid gains of 1.5% in July-September and 2.1% in April-June. Capex trimmed the GDP by an unrevised 0.1 percentage point in the fourth quarter after providing a positive 0.3-point contribution in each of the previous two quarters.
Based on the results of a quarterly business survey conducted by the Ministry of Finance released last week, the median economist forecast was no revision to the preliminary estimate. Some had forecast capex would turn out to be firmer in a range of 0.2% to 0.4% drops while others had expected a downward revision ranging from 0.6% to 0.8% declines.
The demand-side survey by the MOF showed that combined capital investment by non-financial Japanese companies rose 7.7% on year in the October-December quarter, slowing from a 9.8% increase in July-September but faster than a 4.6% rise in April-June. On quarter, combined capital outlays gained a seasonally adjusted 0.5% after rising 2.3% in the previous quarter.
The capex figures in the preliminary GDP calculation are based solely on supply
side data.
Despite the recent pullback, business investment is generally supported by demand for automation, government-led digital transformation and emission control.
External Demand Picks Up After Q3 Surge in Service Payments
External demand was unexpectedly revised up but only slightly. Net exports of goods and services — exports minus imports — made a positive 0.4 percentage point contribution (revised up from 0.3 point) to the total domestic output in the fourth quarter after pushing down the GDP by a sharp 0.6 point in the third quarter.
Japanese exports posted a fifth straight quarterly gain, up 1.5% (revised up from 1.4%), in October-December, with the pace of increase decelerating from 2.5% in July-September. Imports marked their first drop in five quarters, down a slight 0.4%, after a 5.5% surge in the previous quarter led by service payments.
The number of visitors from other countries has continued to pick up since the government eased its Covid border control rules in October, leading to higher spending by foreign visitors, which is counted as exports.
Drop in Private Inventories Pulls Down GDP; Public Works Revised Up
Private-sector inventories provided a negative 0.5 percentage point contribution to the October-December GDP, as seen in the preliminary data, after pushing up the third quarter GDP by 0.1 point. Forecasts for the second reading ranged from 0.6% to 0.3% decreases. Companies appeared to have used built-up inventories to meet shipment needs.
Public works spending recorded a 0.3% drop (revised up from a 0.5% fall) on the quarter in October-December after rising 0.7% in July-September and marking its first quarter-on-quarter rise in five quarters, up 0.6%, in April-June, when the government implemented projects included in the supplementary budget from the previous 2021 fiscal year. It was forecast to be revised up to a slight 0.1% dip (forecasts ranged from a 0.3% drop to a 0.1% rise).
Public investment trimmed the fourth-quarter total domestic output only slightly by a negative 0.0 percentage point after making zero contribution to the GDP in each of the previous two quarters.