–Q3 Contraction Caused by Surge in Imports, Large Service Payments Overseas
–Consumption Slower but Resilient Despite Covid Spike at Peak of Summer
–Capex Demand for FY22 Solid Amid Digital, Green Transformations
–Q4 GDP May Rebound on Fiscal Support but Global Uncertainties Remain
By Max Sato
(MaceNews) – Japan’s gradual economic recovery led by resilient consumption and solid business investment was dented by a surge in imports in the July-September quarter, but the surprise first quarterly contraction in four quarters may be slightly smaller than initially estimated, thanks to expected upward revisions to capital expenditures and public works spending.
But economists also warn that the revised (second preliminary) GDP data for the third quarter of 2022, due at 0850 JST Thursday, Dec. 8 (2350 GMT/1850 EST Wednesday, Dec. 7), may show wide-ranging revisions to recent figures as the Cabinet Office is conducting its annual reviews as well as tweaking some statistical methods.
The real gross domestic product is forecast to have contracted 0.3% on quarter, or an annualized 1.0%, in the third quarter, little changed to revised up slightly from the initial estimate of a 0.3%, or an annualized 1.2% decline, according to the median forecasts by 10 economists compiled by Mace News. The forecasts ranged from decreases of 0.3% to 0.1%, or an annualized pace of 1.3% to 4.0%.
In the preliminary GDP data for July-September released last month, 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.
“There is no change to the status that the economy is picking up gradually, mainly backed by domestic demand,” Economic and Fiscal Policy Minister Shigeyuki Goto said at the time. “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.”
Looking ahead, the economy may rebound in the October-December quarter but its outlook remains uncertain as industrial production posted the second straight monthly drop in October, hit by slowing global demand, while the cost of living is rising fast and real wages are falling, eroding the purchasing power of many households. The eighth wave of the pandemic is also emerging in many parts of Japan after the previous wave led to record numbers of infections from late July to late August.
On average, 35 economists polled by the Japan Center for Economic Research from Oct. 26 to Nov. 2 forecast the GDP would grow 2.14% at an annualized pace in the October-December quarter before slowing to just over 1% in each quarter of 2023, according to the center’s ESP Forecast released on Nov. 10 ahead of the preliminary Q3 GDP data. Their forecasts were based on their average estimate that the economy had grown 1.21% in July-September, much stronger than the actual initial figure of a 1.2% contraction.
Slower Consumption Growth Seen Unrevised
Private consumption, which accounts for about 55% of GDP, is forecast to show an unrevised 0.3% rise on quarter in the third quarter, following a 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 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.
Upward Revision Expected for Solid Capex
The quarter-on-quarter growth in business investment in equipment is forecast to be revised up slightly to a 1.6% increase on quarter from an initial 1.5% rise, judging from the results of a quarterly business survey conducted by the Ministry of Finance released last week. In the preliminary data, the increase in capex slowed from a 2.4% rebound in April-June, but it pushed up the GDP by 0.2 percentage point after providing a positive 0.4-point contribution in the previous quarter. The Bank of Japan’s quarterly Tankan survey for September showed companies revised up their capex plans for fiscal 2022 ending next March.
The demand-side survey by the MOF showed that combined capital investment by non-financial Japanese companies rose 9.8% on year in the July-September, quarter, accelerating from a 4.6% increase in April-June. On quarter, combined capital outlays gained a seasonally adjusted 2.4% after rising 4.1% in the previous quarter.
The capex figures in the preliminary GDP calculation are based solely on supply
side data.
Some capital investment plans are being carried over from fiscal 2021, 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
No revisions are expected to external demand. In the preliminary data, 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. In the previous quarter, the key measure of external demand raised the GDP by 0.2 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% in April-June.
Imports soared 5.2% on rising prices of various goods after rising 0.8% in 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 Dip, Public Works Seen Revised Up
Private sector inventories are forecast to have provided a negative 0.1 percentage point contribution to the July-September GDP, as seen in the preliminary data, after pushing down the Q2 GDP by 0.2 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. It is forecast to be revised up to a 1.5% increase.
In the preliminary data, public investment raised the third-quarter total domestic output by 0.1 percentage point after making a positive 0.1-point contribution to the GDP in the second quarter and trimming 0.2 point off the first-quarter output.