Tuesday, February 16, 2010

Japan: 4Q real GDP jumped 4.6%, but details are not so encouraging

Japan: 4Q real GDP jumped 4.6%, but details are not so encouraging

Fourth quarter real GDP was stronger than expected, jumping 4.6%q/q, saar. However, details were not so encouraging; inventories continued to increase through last year when the inventory to final sales ratio elevated, and public consumption rose more than our expectation, which is basically irrelevant to economic cycle. While the strong growth in 4Q GDP validated our relatively bullish view that Japan's export-driven recovery continued, the details were not so positive in terms of near-term outlook. We maintain our forecast on 1H10, which looks for a slowdown to 1.5-1.8%ar growth from an average of 3.3% growth between 2Q09 and 4Q09.

Other details were not so far away from our expectation, but they were slightly softer. Indeed, despite a 1.7%ar fall in real labor income, private consumption was firm (+2.7%) as expected, rising at a close pace to in 3Q (2.4%). Net trade contribution to GDP growth (2.2%pt) was stronger than our expectation (1.1%pt), but that was mainly due to the softer than expected imports (+5.3%, instead of +15.0%) that probably portrayed the weakness of domestic demand. The capex eventually turned to grow (+4.0%), but the pace was much less than expectation (+12.0%). The decline in housing and public investment was larger than anticipated.

Worth noting is that the firmness of private consumption was mainly driven by the durable goods consumption, which has been supported by government incentives to purchases the enviroment-frendly goods. Service consumption fell again in 4Q. This skewed strength suggest that underlying trend of consumption remains weak when labor income continues to decline.

The revision of past data was significant, especially in 2Q (from 2.7% to 5.2%), mainly due to the change of export series, which reflected the revision of seasonal adjustment. According to the Cabinet Office, the motivation for the revision was that seasonal factors of the trade series were distorted by the extraordinary plunges in 4Q08 and 1Q09. The Office decided to effectively exclude these periods to avoid the distortion in the estimation of seasonal factors. On the other hand, the 3Q growth was revised down to 0.0% from 1.3% with a large downward revision in private consumption (from 3.8% to 2.4%) and upward revision in imports (from 13.9% to 23.3%). The large swing in growth rate after the 12.3% plunge in 1Q09 (5.2% in 2Q, 0.0% in 3Q, 4.6% in 4Q) made difficult to judge the trend, but the average of these three quarters (3.3%) looks reasonable rate of growth, which is decisively higher than the 0.5% potential growth rate, but definitely soft recovery after the record downturn in 4Q08 and 1Q09

JPMorgan Securities Japan Co., Ltd
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