Japan’s Real GDP Growth Softens in the 4Q of 2017

By Harumi Taguchi, principal economist at IHS Markit

Photo: Cabinet Public Relations Office

Key Points:

  • Japan’s real GDP growth in the fourth quarter (Q4) of 2017 rose 0.1% quarter to quarter (q/q), or 0.5% q/q annualized. As a result, real GDP growth rose 1.6% for the year 2017, the highest growth since 2013.
  • Net exports, the major contributor to the 0.6% q/q rise in the previous quarter, had no contribution to the q/q growth in this quarter’s real GDP, as a solid 2.9% q/q rebound in imports (thanks to improved production and consumer goods, including iPhones) outpaced a 2.4% q/q rise in exports.
  • Consumer spending rose 0.5% q/q, thanks largely to rebounds in spending on durable goods and services.
  • Private capital expenditure (capex) continued to soften, to 0.7% q/q.
  • Nevertheless, the fifth consecutive quarter of increase was thanks to improved capacity utilization driven by exports and also demand for machinery and equipment to counter labor shortages.
  • These upside factors were partially offset by continued declines in private residential investment and public demand.

IHS Markit Views:

IHS Markit expects growth for Japan’s real GDP to continue over the near term. Consumer demand will probably weaken due to disruption caused by heavy snow, and high fresh food and energy prices in the first quarter of 2018.

The weakness in new housing construction starts and other construction orders suggests continued declines in private residential investment and public works. The slump in private residential investment is likely to extend until front-loaded demand emerges ahead of the planned consumption tax increase set for October 2019. However, the Nikkei Japan PMI, calculated by IHS Markit, signals strengthened business activity and continued brisk external orders over the near term.

Thanks to strengthened outlooks for global economy, external demand is likely to remain robust because of solid external machinery orders, which will support a continued increase in capex.

IHS Markit revised its real GDP growth for 2018 to 1.4%, anticipating softening from 2017 but still above potential growth. However, recent financial turmoil and rapid yen appreciation are concerns.

While the yen’s strengthening could ease inflationary pressure and support purchasing power, corporations could be cautious about wage increase and capex plans for fiscal year 2018, which starts in April 2018.

This could make it harder for the Bank of Japan (BoJ) to reach its target of 2% inflation, but it is unlikely to force the BoJ to change its current monetary policy over the near term. Further strengthening in real GDP growth will need sustained growth in domestic demand.