Jakarta (TheInsiderStories) – Japan’s real GDP growth in the third quarter (Q3) was revised down to a contraction of 0.6 percent quarter to quarter (q/q, or 2.5 percent q/q annualized) from the initial estimate of 0.3 percent q/q (or 1.2 percent q/q annualized) contraction.
The growth in Q2 was also revised down from a 0.8 percent q/q (or 3.0 percent q/q annualized) rise to a 0.7 percent q/q (or 2.8 percent q/q annualized) increase.
The downward revision was due largely to weak capital expenditure, which declined 2.8 percent q/q, reflecting a sharp contraction in fixed investment in financial statements statistics of corporations.
While major components of gross fixed capital foundation declined, except for residential investment, major factors that contributed to the q/q contraction in real GDP were a 3.1 percent q/q drop in investment in machinery and equipment (excluding transportation equipment) and a 2.5 percent fall in other building structures.
Reflecting weaker-than-expected Q3 results, IHS Markit revised down its 2018 real GDP growth outlook for Japan to 0.8 percent but kept its 2019 outlook at 0.9 percent.
Harumi Taguchi, Principal Economist, IHS Markit’s view remains that the contraction in Q3 is temporary and that growth will remain moderate until the consumption tax increase in October leads to a surge-and-drop in real GDP growth.
A solid rebound in manufactures’ shipments in October, up 5.3 percent month on month (m/m), suggests the rebound in investment in Q4 could be stronger than previously anticipated, even though the Nikkei Japan purchasing managers’ index, calculated by IHS Markit, signaled slower improvement in output in November.
Private machinery orders, excluding volatiles – a leading indicator of capex – does not indicate an immediate decline in capex, given that industry anticipated a continued increase in Q4. Construction orders for nonresidential buildings also maintained a modest uptrend in Q3.
While higher energy and fresh food prices led to a decline in monthly earnings for the third consecutive month and resulted in softer job openings in October, recent softening of energy and fresh food prices will underpin private consumption in short term, although weak consumer sentiment could keep consumers cautious about spending.
The drop in consumer demand following front-loaded demand ahead of the tax increase should not be severer than what Japan experienced after the April 2014 consumption tax increase, thanks to wage increases, smaller tax increase and various measures that the government is currently planning to implement to offset the impact.
In addition to a JPY1 trillion stimulus package passed by the Diet, the government plans to introduce additional JPY 3 trillion stimulus to boost recovery from natural disasters and to mitigate downside risks from the introduction of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, slated to go into effect in late December 2018, and the free trade agreement with the EU, expected to be effective in February 2019. This will probably support public spending in early 2019.
That said, risks are skewed to the downside. Major threats are the repercussions from global trade tensions, particularly between the US and China. Although trade talks between the US and Japan are not expected to turn hostile, pressure to narrow the trade surplus with the US could affect some industries, particularly for autos and agriculture, and persistent concerns could weigh on business sentiment.
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