Naomi Fink, Chief Global Strategist at Amova AM, has commented on Japan’s latest GDP figures.
Q1 Real GDP out-performed expectations, up 0.5% q/q (2.1% annualized) versus 0.4% (1.7% annualized) expected, according to Bloomberg. The GDP deflator, at 3.4% y/y, and the domestic demand deflator at 2.6% y/y compared favorably to the BoJ’s 2% target (though not its direct subjects).
Moreover, the breadth of demand showed a high-quality growth picture, which may add evidence that inflation is broadening. This is relevant given the ongoing internal debate among BOJ board members over whether Japan has already met its mid-term inflation targets (which depend on “underlying” inflation), and therefore of ongoing BOJ rate normalization.
Domestic Demand: improving in quality
Domestic demand expanded by 1% on an annualized basis (0.2%) quarterly, which on the surface does not appear exceptional. However, because of this, private consumption and private non-residential investment were both up 1.1% annualized. The main detractor was a -0.1% contribution to GDP in private inventories, which may present a case for ongoing positive capital expenditure next period, so long as the demand outlook remains firm (BOJ Tankan bears watching, among other indicators). Public investment, up 5.7% annualized, also remained supportive of domestic growth.
Exports: pro-cyclical support
The ongoing global capex boom has abetted growth in Japanese exports, which expanded at a robust 2.0% y/y, surpassing the 1.3% growth in imports over Q1. We note; however, that early Q1 preceded the outbreak of hostilities in Iran, and that spillover impacts from the commodity surge may be working their way through global economies with a lag. It is possible that future quarters may be vulnerable to signals that terms of trade have since deteriorated – mostly due to the surge in commodity prices, but also in part due to the weakness of the yen.
Overall: resilience amid cyclical surge
The overall picture portrayed by Q1 GDP growth is one of improving breadth and therefore quality of growth – it is evident that the surge in exports proved a large quarterly driver of growth, but the improvements in domestic demand show some factors of resilience. Although the drawdown in inventories in Q1 may be followed by future quarters of restocking, the balance of government to private expenditure should be monitored.
Although one release does not define a trend, markets will be watchful of ongoing signals that government investment centers around longer-term capacity building (designed to ease bottlenecks and to increase domestic resilience) rather than crowding out private investment. As JGB yields continue to rise, expect markets to lend ongoing scrutiny to government spending programs for appropriate signals of credibility as well as clear delineation of public versus private investment theses.
