Japan's economy performed better than expected in the last quarter, but the impact of October's consumption tax increase now looms large - Photo: Special.

JAKARTA (TheInsiderStories) – Japan’s real gross domestic product (GDP) growth for the third quarter (3Q) was revised up to 0.4 percent quarter to quarter (q/q) or 1.8 percent annualized from 0.1 percent q/q or 0.2 percent q/q annualized.

Reflecting annual revisions, including seasonal adjustments, real GDP growth was also revised up for 1Q and 2Q. The upward revisions largely reflected stronger private capital expenditure (Capex), as well as softer destocking.

The 1.8 percent q/q rise of Capex was thanks largely to increases in machinery equipment, up 2.4 percent q/q and transportation equipment, up 4.9 percent q/q, as well as intellectual property products, up 1.9 percent q/q.

The softer decline in inventory largely reflected increases in inventories of raw material and supplies. The increase in inventory of raw material and supplies partially offset faster declines for inventories of work in progress and store stocks.

The revisions lifted domestic demand from 0.2 percent q/q at the time of the previous release to 0.6 percent q/q. All major components were revised up, not only Capex and inventory.

Household expenditure was revised up slightly, to 0.5 percent q/q, reflecting increased services spending. External demand remained subdued with no change to its 0.2 percentage point negative contribution to real GDP growth, while both exports and imports were revised up marginally.

The revisions for 3Q real GDP suggest solid Capex despite sluggish sales and corporate profits. That said, real GDP growth for the 4Q is likely to turn negative at a faster pace than previously anticipated by IHS Markit, although the contraction is still likely to be softer than the one Japan experienced after the previous consumption tax increase in April 2014, from 5 to 8 percent.

October household expenditure and November new car sales suggest the drop-out of demand after a surge ahead of the consumption tax and disruption caused by super typhoon Hagibis hit spending on some goods harder.

The disruption caused by super typhoon Hagibis is also likely to weigh on Capex in 4Q, while machinery orders signaled weaker investment in machinery over the near term. Global uncertainties remain concerns for external demand, which could lead to continued destocking and weigh on Capex.

That said, refracting upbeat revisions, IHS Markit has revised up its outlook for Japan’s real GDP growth for 2019 to 1.1 percent while maintaining the outlook for 2020 at 0.3 percent.

Currently, IHS Markit has not included the ¥26 trillion (US$240 billion) stimulus package (including ¥13 trillion in government expenditures) that the cabinet approved last week. The upward revisions of 3Q results with the government stimulus plans would probably not spur the Bank of Japan to rush to additional easing despite weak inflation.

While IHS Markit includes reconstruction works and national land resilience plans outlined for the fiscal year 2019 budget, detailed funding plans have not available so it is still unknown how much additional stimulus is included and the extent to which they will be effective.

While the stimulus package is an upside factor for 2020 to underpin domestic demand, it will probably not be significant, given that public works are often constrained due to labor shortages. A similarly major stimulus package in FY 2016 brought disappointedly weak contributions to public investment.

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