Japan’s real GDP growth unexpectedly revised down in Q1; outlook remains moderate

Photo by Government of Japan

By Harumi Taguchi, principal economist at IHS Markit


Key Points:

  • Japan’s real GDP growth for the first quarter (Q1) of 2017 was revised down to 0.3% quarter to quarter (q/q), or 1.0% q/q annualized, from 0.5% q/q or 2.2% q/q annualized.
  • The surprisingly softer growth was mainly due to the downside revision to inventory changes, from a positive contribution of 0.1 percentage point to the q/q growth in real GDP, to a negative contribution of 0.1 percentage point. The downside revision to the inventory change was due largely to weak figures for inventories of raw materials, reflecting newly available data from the production side and Q1 corporate financial statements.
  • The weakness in inventory changes offset the upward revision for private capital expenditure (capex), which rose to 0.6% q/q from 0.2% q/q. The upward revision to capex reflected stronger investment in machinery and equipment in Q1 corporate financial statements. However, there are no changes in the moderate growth trend in capex.
  • Investment in other buildings and structures rose 0.6% q/q, following two consecutive quarters of decline. But this was tempered by a 0.4% q/q decline in investment in intellectual property products while investment in transportation equipment and other machinery and equipment continued to increase modestly, moving up 1.8% q/q and 0.8% q/q, respectively.


IHS Markit Views:

Despite the downside revision, IHS Markit maintains its outlook for Japan’s real GDP growth at 1.3% in 2017. The real GDP growth still remained positive for the fifth consecutive quarter, which was above its potential growth.

Consumer spending will likely remain modest due to weak wage increases, although the tight labor market should gradually lift wage increases. Solid external orders for machinery and industry’s production outlook for April suggest that ongoing uptrends in exports and industrial production will continue over the near term, although outlook for machinery orders in Q2 could mean that sluggishness in capex will persist.

The current estimates of inventory changes in materials by Economic and Social Research Institute of Cabinet Office suggests that inventory changes are likely to make a positive contribution to Q2 real GDP growth, which will likely make more stable q/q growth. The Nikkei Japan Composite Purchasing Manager Index (PMI) created by IHS Markit rose 53.4 in May to the highest level in 40 months, and this also suggests ongoing upward momentum of economic activities.

While growth is likely to remain moderate thanks to ongoing upside for external demand, uncertainties over the global economy and the associated safe-haven yen appreciation could soften external demand and make it difficult for companies to map out investment plans for the new fiscal year and weigh on capex, if the yen appreciation persists. The strength of this growth will depend on how corporate sentiment improves in tandem with global uncertainties.