Japan: Domestic demand leads growth in Q1
May 16, 2017
Improving domestic demand, coupled with resilient activity in the all-important external sector, propelled growth at the outset of the year. GDP rose 2.2% in Q1 over the previous quarter in seasonally adjusted annualized terms (SAAR), which was above the 1.4% increase recorded in Q4. Q1’s increase exceeded the 1.7% expansion that market analysts had expected and represented the fastest rise in one year. On an annual basis, the economy expanded 1.6% in Q1 (Q4: +1.7% year-on-year).
Private consumption recovered in Q1 after nearly stagnating in Q4 (Q4: +0.2% quarter-on-quarter SAAR; Q1: +1.4% qoq SAAR). That said, there is widespread skepticism whether households will be able to sustain Q1’s healthy performance in the quarters ahead as wage growth remains limited. Adding to these concerns, investment growth weakened at the outset of the year. Growth in private non-residential investment slowed markedly to 0.9% (Q4: +7.6% qoq SAAR), while gross fixed capital formation expanded a softer 1.0% (Q4: +2.6% qoq SAAR).
A competitive yen and robust global demand caused exports of goods and services to expand a strong 8.9% in Q1 (Q4: +14.1% qoq SAAR). Imports grew 5.5% (Q4: +5.3% qoq SAAR) on the back of rising prices for raw materials.
Japan’s export-driven recovery is highly vulnerable to external demand swings. In this regard, uncertainty regarding economic policies in the United States and signs that the uptick in the global production cycle could come to an end have the potential to put a dent in overall growth. Moreover, Japan’s tight labor market has not yet translated into more cash in households’ pockets. This factor, coupled with slightly higher inflation, is eroding consumers’ purchasing power, preventing any significant and sustained recovery in consumer spending.