Preview: Japan Q4 GDP Modest Rebound Expected, Led by Capex, Net Exports but Consumption Seen Weak Amid High Costs

By Max Sato

(MaceNews) – Japan’s gross domestic product for the October-December quarter is forecast by economists to rebound a modest 0.4 percent on quarter, or an annualized 1.6 percent, after suffering its first contraction in four quarters in July-September, led by a slight pickup in business investment and a temporary jump in service exports, but overall domestic demand remains sluggish as elevated costs are squeezing consumers.

The median forecast for the Q4 real GDP growth is based on projections by 10 economists compiled by Mace News, which ranged from 0.1% to 0.9% increases on quarter, or 0.4% to 3.7% gains annualized.

The Cabinet Office will release preliminary GDP data for the final quarter of 2023 at 0850 JST on Thursday, Feb. 15 (2350 GMT/1850 EST Wednesday, Feb. 14).

The expected rebound would follow contraction of 0.7% on quarter, or an annualized 2.9% in July-September, when private inventories plunged, net exports slipped after a sharp rebound in April-June, public works spending slowed, pent-up demand for eating out and traveling waned, and firms turned cautious about capital investment.

From a year earlier, the economy is expected to have expanded 1.9% in October-December for an 11th consecutive increase, following a 1.5% rise in July-September.

Looking ahead, the economy in January-March is expected to show a modest rebound but faces uncertainty. Some global supplies have been delayed and transportation costs pushed up by the impact of attacks in the Red Sea, which has prompted shipping firms to avoid the Suez Canal in Egypt, a key route for shipments to and from Europe. Congestion at the drought-hit Panama Canal is also disrupting cargo movements between Asia and the U.S. East Coast.

In addition to geopolitical risks, the government has also warned that the powerful New Year’s Day earthquake in the northwestern region of Hokuriku has reduced electronic parts supply and battered tourism. The magnitude 7.6 quake jolted the Sea of Japan coast areas in Ishikawa Prefecture, killing more than 230 people, most of them crushed under their collapsing homes, and causing damage to more than 30,000 houses. Some areas are still without water and electricity.

Japanese industrial output is forecast to slump in January due to suspension of all domestic production by Toyota Motor group firm Daihatsu over a vehicle safety scandal from late December until mid-February, which appears to be having a widespread impact beyond the auto industry. To make matters worse, Toyota has suspended shipments of 10 models since late January after its supplier Toyota Industries admitted to cheating on engine testing.

Domestic Demand, Consumption Both Seen Flat

Domestic demand is forecast to provide zero contribution to the fourth quarter GDP (forecasts ranged from a negative 0.3 point to a positive 0.2 point), after lowering third quarter growth by 0.6 point. A slight rebound in business investment is expected to be offset by flat consumer spending and a continued decline in public works spending.

Private consumption, which accounts for about 55% of GDP, is expected to be unchanged on quarter in the fourth quarter (forecasts ranged from a 0.3% drop to a 0.3% gain) as elevated costs for daily necessities weighed on many households. It would follow a 0.2% drop in the third quarter, which was the second consecutive decline.

Demand-side data showed the core measure of real average household spending (excluding housing, motor vehicles and remittance), a key indicator used in GDP calculation, rebounded a modest 0.6% on quarter in October-December for the first rise in four quarters after dipping 0.8% in July-September.

The Bank of Japan’s supply-side consumption activity index fell a seasonally adjusted 2.0% on the month in December after edging up 0.4% in November. The index slipped 1.2% in the October-December period compared to July-September, when it rose 1.0%. Figures exclude inbound tourism consumption but include outbound tourism spending.

Capex Expected to Rebound but Lackluster

Business investment in equipment is expected to rise 0.3% on quarter in October-December (forecasts ranged from a 0.2% drop % to a 1.0% rise) after falling 0.4% in July-September.

Some firms remain cautious about implementing their plans amid elevated costs and uncertainty over global growth, although capital investment is generally supported by demand for automation amid broad-based labor shortages as well as government-led digital transformation and emission control. 

The latest industrial production data showed that shipments of capital goods excluding transport equipment – a key indicator of business investment in equipment in GDP data – rose a modest 1.3% on quarter in October-December after falling 4.2% in July-September, rebounding 3.8% in April-June and slumping 6.5% in January-March.

Net Exports Seen Posting Rebound on Services Income

Net exports of goods and services – exports minus imports – is forecast to make a positive 0.5 percentage point contribution to the total domestic output (forecasts ranged from plus 0.1 to 0.8 points) after pushing down the GDP by 0.1 point in the previous quarter. But this is largely due to what is believed to be a temporary surge in services income (copyright royalties) and thus external demand appears to be nearly flat. 

Japanese exports are expected to mark a third straightly quarterly rise in the October-December quarter GDP, after edging up 0.4% in September-July. Imports are expected to rise for a second month in a row after rising 0.8% in the third quarter and slumping 3.3% in the second quarter.

The BOJ’s real export index rose 0.2% on quarter in the October-December period after a 0.6% gain in July-September, a 2.4% rebound in April-June and a 3.3% dip in January-March. The slight increase in Q4 was led by second straight rises in shipments of capital and information technology goods, which were partly offset by a pullback in both intermediate goods and the autos and auto parts category.

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.  

Private Inventories Seen Flat, Public Works Spending Remains Weak

Private sector inventories are expected to provide zero contribution to the fourth quarter GDP (forecasts ranged from a 0.2-point drop to being flat), after pushing down the third quarter GDP by 0.5 percentage point.

Public works spending is forecast to post a second quarterly drop, down 0.5% in October-December (forecasts ranged from 2.4% to 0.1% drops), after marking its first quarterly decline in three quarters, down 0.8%, in July-September. The effects of earlier spending funded by the supplementary budget for fiscal 2022 that ended in March 2023 had run its course.