By Harumi Taguchi, Principal Economist, IHS Global Insight
Key Points:
- Japan’s real GDP rose 0.5% quarter to quarter (q/q, or 2.2% q/q annualized) in the third quarter (Q3) of 2016,following 0.2% q/q growth (or 0.7% q/q annualized) in the previous quarter.
- The better-than-expected growth reflected an increase in net exports, contributing 0.5 percentage point for the q/q growth inreal GDP, while a modest 0.2% q/q rise in nominal GDP suggested deflation also helped lift real-term growth. The improvement in net exports was attributed largely to the reboundin exports, thanks to the recovery in demand for electric parts and devices and some material goods.
- Despite upside from external demand, domestic demand remained weak. Residential investment continued to grow 2.3% q/q thanks to historically low mortgage loan rates and changes in deductions regardinginheritance tax. However, consumer spending held at the same level of modest growth (0.1%q/q) as in the Q2. Private capital expenditure (capex) also held at the Q2 level. Modest growth in public demand continued (+0.2% q/q). Softer public work spending offset increases in government consumption.
IHS Global Insight Views:
The Q3 results were surprisingly stronger than IHS Markit had expected. The strength of net exports, however, is unlikely to continue, given the modest outlook for the global economy and persistent uncertainties. Demand for electric parts and devices depend largely on the cycle of new models of theiPhone and other mobile devices, and changes in spending patterns of visitors from abroad could continue weighing on service exports, which have kept declining for a few quarters. On the other hand, the recent yen softening will help ease the downside from the yen’s strengthening during the first half of 2016.
IHS Markit will slightly revise up Japan’s real GDP growth forecast to 0.7% for 2016, but maintains its view that domestic demand will remain weak over the near term. Because of weak domestic demand, real GDP growth could turn slightly negative in the fourth quarter. A supplementary budget approved in October is expected to prevent a usual slowdown in public-works spending after the end of fiscal year. That said, the acceleration of structural reforms will be an important factor determining sustainable growth.
However, the second preliminary release of GDP data (scheduled for 8 December) could include large revisions, reflecting the introduction of new methodology and standards. The new standards, which many countries have already adopted, will apply to research and investment and include other revisions. The revisions are likely to be positive for nominal GDP.
An uptick in the economy and the yen softening, in tandem with the government’s stimulus plans, are factors that could ease deflation. The Bank of Japan is likely to leave its current monetary policy unchanged, at least through the first half of 2017, unless rising uncertainties spark yen strengthening again.