Japan Q1 GDP up 0.5% q/q, 2.1% annualized, beating forecasts

20, May. 2019

TOKYO, NNA - Japan's economic growth in the January-March quarter came in much stronger than forecast, led by the first net-export gain in a year on a sharp drop in imports and a smaller-than-expected decline in capital investment.

However, exports slumped, posting the first quarter-on-quarter drop since July-September 2018 amid global uncertainty caused by the U.S.-China trade dispute.

The Cabinet Office released preliminary gross domestic product data for the first quarter on Monday.

Key points:

―― Japan’s GDP grew a real 0.5 percent from the previous quarter, or an annualized 2.1 percent, in January-March, much stronger than the median economist forecast of a 0.1-percent contraction, or a 0.2-percent decline at an annualized pace. The second consecutive quarterly growth was supported by external demand (+0.4 percentage point contribution) and domestic demand (+0.1 percentage point).

―― The Q1 growth follows a downwardly revised 0.4 percent rise q/q, or 1.6 percent annualized in October-December, and a 0.6 percent contraction, or 2.5 percent annualized in July-September.

―― Among domestic demand, private consumption, which accounts for about 60 percent of GDP, fell 0.1 percent q/q (-0.0 percentage-point contribution), as expected, while business investment in equipment decreased 0.3 percent (-0.0 percentage point), much firmer than expected. Private-sector inventories and public investment each pushed up the overall economic growth by 0.1 percentage point.

―― Exports fell 2.4 percent q/q in the first three months of the year after rising 1.2 percent in October-December, but imports slumped at a faster pace of 4.6 percent after rising 3.0 percent in the final quarter of 2018. This led net exports (exports minus imports) to push up GDP by 0.4 percentage point.

Takeaway:

―― The growth in private consumption in October-December was revised down to a 0.2 percent q/q rise from the previous estimate of a 0.4-percent gain, which resulted in a limited 0.1-percent contraction in consumption in January-March. Economists expect April-June consumption to rebound, partly due to positive sentiment about the new imperial era that began on May 1.

―― Capital investment plans are high as some sectors cope with labor shortages and upgrade obsolete production facilities. There is also demand for investing in computer software for the new imperial era and ahead of the sales tax hike to 10 percent from the current 8 percent planned in October. However, the uncertainty over global trade and growth may put a damper on actual implementation of capex.

―― Going forward, Japan’s GDP growth for fiscal 2019 that began in April is supported by a positive 0.5-percentage-point spillover from fiscal 2018, when the last three months (January-March) showed a higher growth rate than the average for fiscal 2018. “This means fiscal 2019 GDP would mark 0.5 percent growth even if the economic growth in each quarter were flat,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management.