IHS Markit: Solid Net Exports Drive Japan’s real GDP growth in Q3

By Harumi Taguchi, principal economist at IHS Markit

JAKARTA  – Japan’s real GDP growth for the third quarter (Q3) of 2017 rose 0.3 per cent from previous quarter ( q/q), or 1.4 per cent from the same quarter last year.

The seventh consecutive quarterly increase largely reflected a solid rebound in net exports, which offset sluggishness in domestic demand.

Net exports contributed 0.5 percentage point to the q/q growth in real GDP, thanks to a 6.0 per cent rise in exports while imports fell 6.2 per cent q/q, recording the first decline in five months.

However, consumer spending, one of the major drivers of real GDP growth in Q2, fell 0.5 per cent in Q3 q/q, mainly because of disruption caused by heavy rains.

”This dragged down consumer spending for durable goods and services, worse than what IHS Markit had expected.

Public investment, another major driver of the Q2 real GDP growth, also declined 2.5 per cent in Q3 q/q, following a 5.8 per cent q/q rise in the previous quarter, with waning upside from the fiscal stimulus plan. Residential investment also fell 3.5 per cent for the first decline since Q4 of 2015. Private capex increased for the fourth consecutive quarter, but softened to 0.2 per cent q/q.

IHS Markit Views

IHS Markit expects continued growth in Japan’s real GDP, with a rebound in consumer spending offsetting weaker net exports in Q4. Moderate growth is likely to continue, underpinned by both domestic and external demand. IHS Markit maintains its forecasts for real GDP growth in 2017 and 2018.

Net exports could decline in Q4 with softer export growth and stronger imports. The Nikkei Japan Purchasing Managers’ Index, calculated by IHS Markit, signaled slower export orders in October, but machinery orders from overseas suggest sustained external demand over the near term.

Consumer spending is likely to rebound in Q4 in accordance with less impact from adverse weather, although the Economic Watchers survey suggests that two typhoons and the snap general election weighed on household related activities in October.

Residential investment, however, is set to remain weak until front-loaded demand ahead of the next consumption tax increase emerges.

Public investment will not become a factor to boost near-term real GDP growth, as we do not expect a significant fiscal stimulus in 2018, although Prime Minister Abe has suggested the government will plan a supplementary budget to help increase the capacity of day-care facilities.

The key to sustained strength will largely depend on how and when corporations start accelerating capex. Large increases in private machinery orders in Q3 could mean upward revisions to capex in the second preliminary releases (scheduled for 8 December) or faster growth in Q4.

Solid capex plans of large manufacturers and brisk corporate profits and demand to use machinery and equipment to counter labor shortages should support a continued upside in capex. However, the prolonged weakness was due partially to structural problems.

Continued economic growth, along with moderate but viable increases in employees’ compensation and the implicit deflator in Q3 are in line with the Bank of Japan’s outlook for the economy and inflation. Even though inflation remains far below the bank’s inflation target, it is unlikely to force the central bank to change its current monetary policy settings over the near term. (*)