Consumption in Japan

Japan - Consumption

Economy contracts in Q1

Japan’s economic pendulum continued to swing in Q1: GDP contracted for the fourth time since the onset of the global Covid-19 pandemic in March 2020. According to a preliminary estimate, GDP fell 1.0% in seasonally-adjusted annualized rate terms (SAAR) in the first quarter, contrasting the 3.8% expansion logged in the fourth quarter of last year. Still, the result was better than the market had expected.

The contraction was due to a slowdown in private consumption and a pickup in imports. Private consumption fell 0.1% in the first quarter, which was markedly below the fourth quarter's 10.2% expansion. Private consumption was hit by the Covid-19 restrictions introduced in response to the spread of the Omicron variant. Imports of goods and services growth picked up to 14.1% in Q1 (Q4 2021: +1.4% SAAR).

The reading was supported by government spending, fixed investment and exports. Government consumption bounced back, growing 2.4% in Q1 (Q4 2021: -1.1% SAAR). Meanwhile, fixed investment dropped at a more moderate rate of 2.4% in Q1, from the 3.7% decrease logged in the prior quarter. Exports of goods and services growth sped up to 4.7% in seasonally-adjusted annualized terms in the first quarter, which marked the best reading since Q2 2021 (Q4 2021: +3.6% SAAR).

On an annual basis, economic growth moderated to 0.2% in Q1, compared to the previous period's 0.9% expansion.

Naohiko Baba, chief Japan economist at Goldman Sachs, sees GDP rebounding in Q2 as the economy reopens:

“We forecast real GDP in Q2 to turn positive, centered on private consumption, as with the lifting of the Covid-19 precautionary measures, the early May holiday season has already seen a sharp increase in people mobility. That said, we note that rising inflation resulting from higher commodity prices as well as the weak yen could dampen consumer sentiment. Rising input costs are squeezing corporate profit margins, which is also a source of concern for business investment in the coming quarters.”

Analysts at Nomura also see GDP rebounding in Q2, but point towards the downside risks posed from a slowdown in major trading partners:

“We think the Japanese economy will exhibit strong growth, with real GDP likely to rise in excess of 5% year on year in April–June and July–September 2022, as post-pandemic economic reopening boosts real consumer spending. However, we have also seen a build-up of downside risks that could hamper a smooth restart of economic activity, including a greater-than-expected slowdown in overseas economies, triggered not only by the protracted zero Covid-19 strategy in China, but also rising interest rates and accelerating inflation, and higher-than-expected perceived prices in Japan dampening consumer sentiment and appetite for spending.”

FocusEconomics panelists see the economy expanding 2.2% in 2022, which is down 0.3 percentage points from last month’s forecast, and 1.7% in 2023.