Japan’s economy has entered a temporary lull, but according to our outlook, will avoid recession.
Japan to see real GDP growth of +1.0% in FY15 and +1.7% in FY16, with nominal GDP growth of +2.4% in FY15 and +2.2% in FY16.
Japan’s economy enters a temporary lull: In light of the 2nd preliminary Apr-Jun 2015 GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +1.0% in comparison with the previous year for FY15 (+1.1% in the previous forecast) and +1.7% in comparison with the previous year for FY16 (+1.9% in the previous forecast). Japan’s economy has entered a temporary lull, but we expect it to avoid falling into recession due to the following factors: (1) Continuation of the virtuous circle brought on by Abenomics, and (2) A gradual comeback in exports centering on the US.
Real GDP revised upwards from 1st preliminary report: The real GDP growth rate for Apr-Jun 2015 (2nd preliminary est) was revised upwards to -1.2% q/q annualized (-0.3% q/q) in comparison to the 1st preliminary report (-1.6% q/q annualized and -0.4% q/q). Results also exceeded market consensus at -1.6% q/q annualized (-0.4% q/q). The fact that results exceeded market consensus is attributed to the extent to which inventory investment was revised upwards, coming in well above original expectations. Our comprehensive assessment of this modest revision of the real GDP growth rate is that the 2nd preliminary estimate confirms our previous opinion that Japan’s economy is in a temporary lull due to weak exports and consumption. With inventories accumulating to an extent which was previously unexpected and capex receiving a downward revision, the substance of this revision does not look good.
[drizzle]While inventory investment was revised upwards more than expected, capex suffered a downward revision: Performance by demand component in the revised Apr-Jun 2015 results shows capex suffering a downward revision, but inventory investment getting a larger upward revision than was originally expected, thereby providing some upward pressure to overall results. The results of corporate statistics brought capex investment down by -0.9% q/q, a downward revision in comparison to the 1st preliminary GDP estimate (-0.1%). Meanwhile inventory investment grew by +0.3%pt q/q, an upward revision from the 1st preliminary’s +0.1%pt, exceeding market consensus by +0.2%pt q/q. Looking at inventory investment by category we see that all four major categories were revised upwards, with inventory growth seen in three areas – finished goods, raw materials, and distribution inventory. It should be noted, however, that there are recent signs of inventory accumulating. Meanwhile, public investment was revised downwards from the 1st preliminary report, but no so much as to have a great influence on the final GDP figure. Housing investment, imports and exports were flat in comparison to the 1st preliminary report, while personal consumption and government consumption were revised upwards.
Trends by demand component: Weak exports and consumption bring downward pressure on overall results :Next we take a look at trends in demand components based on the results of the Apr-Jun 2015 (2nd preliminary est). Personal consumption was down by – 0.7% q/q (-0.8% on the 1st preliminary report), its first decline in four quarters, taking a short breather from the recovery trend seen up to now. While the employment environment is improving for households, there have been several factors weighing down on personal consumption: (1) Real compensation of employees from a macro viewpoint declined for the first time in two quarters by -0.2% q/q (-0.2% on the 1st preliminary report), (2) Automobile sales centering on light vehicles have slowed down, (3) Unseasonable weather has brought downward pressure on the economy, and (4) Prices of foodstuffs have been on the rise, making households more budget-minded. Housing investment grew for the second consecutive quarter at +1.9% (also +1.9% on the 1st preliminary report). Looking at the trend in new housing starts, a leading indicator for housing investment as a portion of GDP, the effects of the reactionary decline after last year’s consumption tax increase easing up, and the employment and income environment affecting households is improving, while interest on housing loans is at a low. These factors have helped housing starts make a gradual comeback since the Oct-Dec period of 2014. Housing investment is recorded on a progressive basis, hence there is a lag in performance in comparison to housing starts, but housing investment has now hit bottom and has shifted into a growth trend. Capex declined for the first time in three quarters by -0.9% q/q (-0.1% on the 1st preliminary report) apparently taking a short break from the recent growth trend. However, the sense of overcapacity is easing up amongst corporations and improvements can be seen in corporate earnings, hence the positive environment for capex continues. In addition, considering the fact that capex is experiencing moderate growth on the whole and that there is a firm undertone in corporate plans for capex spending according to the BOJ Tankan, these results should not be taken in an overly negative light. Public investment grew for the first time in two quarters by +2.1% q/q (+2.6% on the 1st preliminary report). Results for the period were favorable, but the effects of having front-loaded government budgets in the past are gradually running out, leaving the leading economic indicator of public investment weak. This means that additional economic measures will be needed in the future in order to avoid a gradual decline.
Exports suffered a decline for the first time in six quarters at -4.4% q/q (also -4.4% on the 1st preliminary report). A decline in exports to both the US and Asia are seen as having contributed to downward pressure on performance. Imports have also slowed down due to the decline in domestic demand (-2.6% q/q, unchanged from the 1st preliminary report) for the first time in four quarters. The major contributor to downward pressure on exports which has expanded during this period is overseas demand (net exports), falling for the second consecutive quarter by -0.3%pt (also -0.3%pt on the 1st preliminary report).
Japan’s economy expected to gradually make a comeback, but a sense of uncertainty regarding the future has been increasing recently: Our basic economic scenario sees Japan’s economy gradually making a comeback. We expect real GDP to improve with personal consumption and exports, which contributed to downward pressure on this report, making a turnaround and capex gradually make a comeback. We expect the economy to return to a positive growth trend in the Jul-Sep 2015 period, even if only by a small amount. However, there is a certain amount of risk that real GDP could be sluggish for the time being. We suggest keeping an eye on the trend in inventory adjustment. Final demand during the Apr-Jun 2015 period was weak, and inventories have accumulated. For this reason we believe that there will be growing pressure to carry out inventory adjustment during the Jul-Sep 2015 period. In addition, considering the trends in the monthly indices, the pace of the comeback for personal consumption and exports could be slow. As for personal consumption, the positive environment for households in the areas of employment and income is expected to gradually lead to a recovery of the growth trend. Nominal wages and income are gaining support from