–Q4 GDP Rise Smaller Than Expected as Private Inventories Drop Sharply
–Consumption Up on Eased Covid Rules, Travel Subsidies After Flat Growth in Q3
–Capex Posts Pullback as Expected but Potential Demand for Investments Solid
–Q1 GDP Seen Supported by Consumption Amid Slowing Global Demand
By Max Sato
(MaceNews) – Japan’s gross domestic product for the October-December quarter posted a slight 0.2% rebound on quarter, or an annualized 0.6% rise, as eased Covid rules and travel subsidies supported consumption while net exports rose after a one-time surge in service imports caused an unexpected contraction in July-September GDP, Cabinet Office data released Tuesdayshowed.
The preliminary data came in much weaker than the Mace News median economist forecast of 0.5% growth (forecasts ranged from 0.2% to 0.7%), or an annualized 1.9% gain (0.7% to 3.0%). The weakness came largely from a bigger-than-expected reduction in private sector inventories and an anticipated slowdown in public works spending.
“The GDP data for the October-December quarter showed the economy continued picking up gradually while living with the Covid pandemic, led by private consumption on travel and eating out and a positive contribution by external demand as eased border control increased inbound spending,” Economic and Fiscal Policy Minister Shigeyuki Goto said in a statement.
The government will swiftly implement its economic stimulus measures to promote sustainable economic growth based on domestic demand while trying to cushion the impact of rising food and energy costs and slowing global growth, he said.
“The best prescription for high prices is to realize continuous wage hikes that will beat price rises,” the minister said, adding that the government will help small businesses raise wages and pass higher costs onto customers.
From a year earlier, the economy rose a modest 0.6% in October-December, posting the seventh consecutive rise following a 1.5% rise in July-September.
The real annualized GDP amount rose to ¥547.52 trillion in the October-December quarter from ¥546.66 trillion in July-September but was lower than the recent high of ¥548.04 trillion hit in April-June 2022. Those figures are above ¥544.50 trillion recorded in the January-March period of 2020, when the GDP grew 0.4% on quarter before the outbreak of the pandemic triggered an 8.0% slump in the following quarter.
On a calendar year basis, the real GDP rose 1.1% to ¥547.52 trillion in 2022 from ¥540.24 trillion in 2021 and was above ¥528.89 trillion in 2022, but it was still lower than ¥552.54 trillion in the pre-pandemic 2019.
Consumer Spending Up on Travel Support, Eased Covid
Private consumption, which accounts for about 55% of GDP, rose 0.5% on quarter in the fourth quarter, coming in line with the median projection of a 0.5% increase (forecasts ranged from 0.3% to 0.8% gains) and after being unchanged (revised down from a slight 0.1% rise) in the third quarter and rising 2.0% in the second 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.
Consumption pushed up the GDP by 0.3 percentage point after making zero contribution to the total domestic output in the previous quarter.
Capex Slips as Expected After Recent Strong Gains
By contrast, business investment in equipment marked its first drop in three quarters in October-December, down 0.5% on quarter, which was weaker than the median forecast of a 0.3% fall (forecasts ranged from a 0.8% drop % to a 0.7% rise), following solid gains of 1.5% in July-September and 2.1% in April-June.
Capex trimmed the GDP by 0.1 percentage point in the fourth quarter after providing a positive 0.3-point contribution in each of the previous two quarters.
The Bank of Japan’s quarterly Tankan business survey released in December indicated solid capex plans for fiscal 2022. Some capex 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 Marks Modest Rebound
Net exports of goods and services — exports minus imports — made a positive 0.3 percentage point contribution to the total domestic output in the fourth quarter, coming in softer than the median forecast of a positive 0.4 percentage point contribution to total domestic output (forecasts ranged from plus 0.1 to 0.5 points).
In the previous quarter, the key measure of external demand pushed down the GDP by a sharp 0.6 point after raising it by 0.1 point in April-June and lowering it by 0.5 point in January-March.
Japanese exports posted a fifth straight quarterly gain, up 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.
Growth in Japanese export values lost steam further in December on slowing global demand as China struggles with a renewed spike in Covid infections and deaths, while lower energy markets and the yen’s slight rebound also reduced import values, leading to a narrower trade deficit.
Private Inventories Slump, Public Works Drop Smaller Than Expected
Private sector inventories provided a negative 0.5 percentage point contribution to the October-December GDP, compared to the median forecast of a negative 0.2-point contribution (forecasts ranged from a 0.5-point drop to zero), after pushing up the third quarter GDP by 0.1 point. Companies appeared to have used built-up inventories to meet shipment needs.
Public works spending recorded a 0.5% drop on the quarter in October-December, smaller than the median forecast of a 0.9% decrease (forecasts ranged from a 1.5% fall to a 0.6% rise), after rising 0.7% in July-September and marking its first quarter-on-quarter rise in five quarters, up 0.5%, in April-June, when the government implemented projects included in the supplementary budget from the previous 2021 fiscal year.
Public investment trimmed the fourth-quarter total domestic output only slightly (negative 0.0 percentage point) after making zero contribution to the GDP in each of the previous two quarters.
Economy Expected to Continue Growth in Q1
Looking ahead, economic growth in January-March may lose some momentum 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. 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.
On average, 36 economists polled by the Japan Center for Economic Research from Jan. 27 to Feb. 3 forecast the GDP would grow 1.28% at an annualized pace in the first quarter of 2023 and 0.91% in the second quarter on the assumption that Q4 GDP grew 2.43%, according to the center’s ESP Forecast released last week.
The Cabinet Office estimates that the GDP would have to grow at a high pace of 1.77% on quarter, or an annualized 7.3%, in the January-March quarter for the economy to hit the official forecast of 1.7% growth for fiscal 2022.
The economy grew a real 2.6% (revised up from 2.5%) 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.