Japan’s real GDP growth for the first quarter of 2019 was revised up marginally to 0.6 percent quarter to quarter. Photo: Privacy.

JAKARTA (TheInsiderStories)Japan’s real GDP growth for the first quarter (Q1) of 2019 was revised up marginally to 0.6 percent quarter to quarter (q/q), or 2.2 percent q/q annualized, from 0.5 percent q/q, or 2.1 percent q/q annualized, the Cabinet Office said on Monday (06/10).

The upward revision largely reflected an improvement in capital expenditure (Capex) in line with a continued increase in investment in plant and equipment as seen in corporate statistics for Q1.

According to IHS Market, the upward revision was ongoing repercussions from the United States (US)-China tensions, that they said: “remain a concern.”

“Industry outlooks anticipate increases in external and private machinery orders in the third quarter, but the Nikkei Japan Manufacturing Purchasing Managers’ Index by IHS Markit for May signals continued contractions in exports and new domestic orders,” Harumi Taguchi, Principal Economist at IHS Markit, said in a released statement.

The Cabinet Office said the main driver behind the Capex increase was an investment in other buildings and structures (up 3.2 percent q/q), while a contraction in investment in other machinery and equipment (down 2.7 percent q/q) largely reflected sluggish exports and production in the manufacturing sector.

The upward revision to the Capex was partially offset by a downside revision to public investment to a growth of 1.2 percent q/q from a 1.5 percent q/q rise.

According to the Finance Ministry, Japan’s current account surplus narrowed by 9.5 percent year on year (y/y) to JPY1.7 trillion (US$15.7 billion) in April, although seasonally-adjusted figures improved from the previous month to JPY1.6 trillion. The y/y weakness was attributed to the trade deficit, reflecting a 6.9 percent y/y rise in imports, while exports continued to decline by 3.7 percent y/y.

Although a softer increase in the number of inbound tourists and a solid increase in the number of Japanese outbound tourists led to a decline in net tourism income from a year ago, the first drop in 25 months.

The service balance deficit narrowed by 29.3 percent y/y to JPY313 billion, thanks largely to increased receipts from other businesses, such as research and development services, and technology and trade-related services. An improvement in direct investment income contributed to an increase in the primary income by 9.6 percent y/y to JPY2.1 trillion.

IHS Markit sees persistent labor shortages are likely to remain a driver of investment in machinery and equipment over the near term. That said, weak exports and production could lead to destocking and weigh on investment in machinery and equipment, while construction orders signal weak non-residential construction over the near term.

Working style reforms (such as increased free time after work), extra holidays related to the imperial transition (30 April, 1 May, and 22 October), and special events (including the 2019 Rugby World Cup and the 2020 Summer Olympics) will support spending on services over the near term.

That said, consumer spending is also likely to remain soft until front-loaded demand ahead of the consumption tax increase in October 2019 emerges, reflecting softer growth in employee compensation and weak consumer sentiment, which could delay recovery after the tax hike.

The increase in net exports was one of the drivers of real GDP growth for Q1, which is due largely to the sharp contraction in imports, offsetting a decline in exports. An increase in imports with a continued contraction in exports in April could lead to deterioration in the net exports and weigh on real GDP growth in the second quarter.

Although Japan’s current account is likely to maintain a surplus, IHS Markit said weaker global growth outlooks could continue to weigh on Japan’s exports of goods, as well as tourism and income from foreign assets over the near term.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com