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First quarter GDP growth at 0.9% - yet the word recession still finding its way into print

Let’s start with what the headlines didn’t tell us: On Friday, the Cabinet Office revised GDP data for the fourth quarter of 2007 downward from 0.9% to 0.6%. The bigger news, however, was that preliminary GDP estimates for the first quarter of 2008 showed a 0.8% increase, which translates into an annualized 3.3% gain.

These figures came as somewhat of a surprise to most commentators, and we should not yet begin speculating on whether or not they might also be revised downwards in three months time. Where was the growth? The Cabinet Office announced that strong exports and a recovery in housing starts were chiefly behind the gain. Although housing starts are nowhere near the dismal levels they were at last summer and fall, it should be noted that they were down 5.7% in January, 5.0% in February and 15.6% in March.

According to the data, housing starts rose 4.6% for the first time in five quarters, after having fallen 9.2% in the fourth quarter of 2007. Exports saw 4.5% growth in the January-April quarter, while imports increased 2.0%. Consumer spending rose 0.% while capital spending fell 0.9%. It was the first fall for capital spending registered in the past three quarters.

In fact, rising materials prices helped contribute to a 25 trillion yen outflow in the first quarter, as import prices continue to rise while export prices remain flat. That 25 trillion yen outflow was an all-time high; will there be anything left for capital spending in the second quarter of 2008? Read more

Business Conditions, Capital Spending, Industrial Output all Down, Yet Consumer Spending Holding Up

The Cabinet Office published its monthly Index of Business Conditions for January earlier today, and we have seen a decline in all three indexes for the first time since September of last year. This report generates three scores, which are referred to as diffusion indexes. The three categories reported are the leading index, the coincident index, and the lagging index. The leading index is meant to evaluate business sentiment for the future, the coincident index measures sentiment in the current period, and the lagging in the period previous to the report. For each index, a score below 50 indicates pessimism, while a score above 50 indicates an optimistic result.

January results showed the Leading Index falling from 50.0 in December to 30.0 in January, while the Coincident Index dropped from 63.6 to 22.2 and the Lagging Index fell from 66.7 to 62.5 (incidentally, we have not seen all three indexes below 50 since February 2007).

The fall in the Leading Index is what tends to worry economy watchers the most. Although it stood exactly on the fence at 50 in December (a figure which has since been revised down to 45.5), the score had seen an encouraging rise from the previous four months, when it checked in at 25.0, nil, 16.7 and 16.7.

Just last week we noted that industrial output had slid 2.0% in January, and that figure seemed to have been caused by nervousness over the course of the US economy. The Leading Index supports that supposition, though fears may be even reach beyond worries over the US economy.

To make matters worse, on Wednesday the Ministry of Finance announced that capital spending fell at its steepest pace in five years during the October-December quarter. According to the Ministry’s data, capital spending declined 7.3% during the fourth quarter, greatly exceeding the expectations of most Japan watchers. Read more

GDP up 0.9% in September-December quarter, exceeding all expectations except one

We’re halfway there.

Back in November, after July-September quarter GDP data was announced to have been a 0.6% increase, we pointed out that Japan’s GDP would need to grow at a 0.9% pace in each of the remaining two quarters in order to hit the government’s target of a 2.1% GDP growth in real terms for fiscal 2007.

This morning, the Cabinet Office announced that Japan’s GDP increased - you guessed it - 0.9% in the October-December quarter. Back in November, almost no one expected to see another quarter with strong GDP figures. The Nikkei even published an article entitled “Strong GDP Data Does Not Warrant Optimism.” I did not read any analysts predicting anything as high as a 0.9% increase.

Does stronger GDP data warrant optimism? We’re almost salivating over breakfast with tomorrow morning’s Nikkei. Of course, we don’t expect anything more than a cautious optimism, if indeed any. After all, these are only preliminary figures.

So what drove the GDP data? According to the Cabinet Office, capital spending rose 2.9 percent from the previous quarter, while consumer spending moved up just a bit, by 0.2 percent. Total domestic demand increased 0.5 percent, despite the fact that housing investment was down 9.1 percent. Exports rose 2.9 percent, with automobile and software exports leading the charge.

Last November, the Nikkei announced that “the fate of Japan’s current expansion will depend more than anything on whether corporate profits will trickle down into household income through fatter paychecks.”

That is not at all how things are playing out, at least not yet. We’re still seeing higher prices and no wage growth. However, please do not mistake disagreement with this one point made by the Nikkei as optimism on our part. We don’t expect to see a 0.9 percent GDP increase in the current quarter. Then again, maybe we should, given that it would bring us right to the government’s target.

The Nikkei also told us this in November:

The country’s economy is in a delicate state, and the policymaking vacuum that has resulted from domestic political turmoil could cause it to enter a serious downturn.

I never bought that one for a second. “Political turmoil?” Ok, there’s no space to get into that here…

So, with GDP results being a surprise and making the next quarter a bit more interesting, will the Bank of Japan pitch in and do something unexpected tomorrow morning?

Capital spending down 1.2% in July-September quarter; GDP to be revised upward?

Earlier today, the Ministry of Finance reported that capital spending had fallen 1.2 percent during the July-September quarter. Following a 4.9 percent fall in the April-June quarter, this is the second consecutive quarter with a fall in capital spending.

According to the Ministry’s results, profit fell 0.7 percent at the firms surveyed. This was the first fall reported in five years.

Bloomberg, however, says that the fall is less than the 2.5 percent that had been predicted by its survey of economists. We also see the warning that risk is developing over Japan’s continued reliance on exports and the health of external markets.

Export growth to Asia has been particularly visible this year, making up for some of the loss that might have resulted from a dropoff in exports to the United States. The question now is whether Asian economies are healthy enough in order to keep growing at a sustained pace and continue with their demand for Japanese products.

Despite the negative news on capital spending, Reuters tells us that its survey of economists predicts a slight upward revision in Japan’s GDP figures for the second quarter. Preliminary figures from the Cabinet Office put second quarter GDP growth at 0.6%, for an annualized rate of 2.6%. The Reuters survey expects to see that revised upward to 0.7% quarterly and 2.7% annually.

The revised figures are set to be released just before 9am on Friday.

GDP up 0.6% in July-September quarter, growth at annualized 2.6%

After revised statistics showed that Japan’s GDP shrank 0.3% (-1.2% annualized) in the quarter to April, statistics released by the Cabinet Office on Tuesday showing that the economy grew 0.6% in the July-September quarter were much welcomed.

We do need to bear in mind that these are preliminary GDP figures. Preliminary GDP estimates of the April-June quarter showed a 0.1% increase, which was revised downward quite strongly to the 0.3% decrease.

Where did the growth come from? The Cabinet Office tells us that strong exports to Asian countries coupled with a ‘modest’ rise in private consumption helped push the economy back into the black last quarter. Exports pushed GDP up 0.4% from the previous quarter while domestic demand led to a 0.2% increase in GDP. Capital spending pitched in a bit as well, finally. It showed a 1.7% increase over the previous quarter, for its first rise in three quarters.

If this data remains unchanged GDP needs to grow at a 0.9% pace (3.7% annualized) in each of the remaining two quarters in order to hit the government’s target of a 2.1% GDP growth in real terms for fiscal 2007.

That won’t be easy. Read more

Machinery orders down 7.6% in September; Credit Suisse warns of recession

It’s still hard to come by good news on Japan’s economy. Last week the Cabinet Office announced that Japan’s September machinery orders fell by 7.6% - quite a bit more than expected. Bloomberg’s survey of 41 economists had predicted a 1.5% fall.

The question is whether this will lead to a slowdown in capital investment, which would certainly not be helpful for GDP figures. We are assuming capital spending to be flat as a contributor in the July-September GDP statistics, and another month of lower machinery orders may help drive it into negative territory, along with the huge dropoff in housing construction. Coupled with fears that exports may slow - especially to the US, where September’s figures were the lowest in four years - and sluggish domestic demand, we’re starting to take Credit Suisse seriously when it says that there is a 40-50% chance of a recession for the Japanese economy:

Shirakawa of Credit Suisse says there is a 40-50 percent chance of a recession in Japan. He said companies are facing risks including the stronger yen, continued fallout from the collapse of the U.S. subprime mortgage market, the possibility of a slowdown in China, faltering demand at home exacerbated by a housing slump, and rising energy prices.

Credit Suisse cuts its FY2008 GDP projections, again

Last Friday, it was announced that Credit Suisse had cut its estimates for Japan’s fiscal 2008 GDP growth from 1.7% to 1.3%. Back in July, Credit Suisse’s estimate stood at 2.9%.

We reported the cut in Credit Suisse’s estimate back on October 18, when it was also announced that Maquire Bank had cut their estimate from 2.5% to 1.9%. Japan Economy News announced - somewhat tongue in cheek - that our projected FY2008 GDP growth would be cut from 1.6% to 1.5%.

Credit Suisse has undercut us, and that will not stand. Japan Economy News is thus forced to cut its estimates for FY2008 GDP growth in Japan from 1.5% to 1.2%.

There are excellent reasons to lower projections now, especially with the downturn in Japan’s housing and construction starts. We also see the Tankan as flattening out, and perhaps extending beyond what could be considered a reasonable length of growth. Recent corporate profits at 16 year highs also spook us - especially when fewer than one third of those firms are in the black.

Japan’s GDP fell 0.3% in April-June Quarter: Revised Cabinet Office Statistics

As was widely expected, the revised GDP statistics for the April-June quarter showed a decline. The Cabinet Office announced today that Japan’s GDP shrank 0.3% during the quarter, for an annualized rate of -1.2%.

Previously, a Nikkei survey of economists predicted a -0.2% quarterly and -0.7% annualized fall.

What happened? Although consumer spending was revised downward from a 0.4% gain to 0.3% (a fall that was predicted here), it was the decline in capital spending that really hurt the economy. After having announced a 1.2% increase in its preliminary results, the Cabinet Office bit the bullet and stated today that capital spending actually fell 1.2% during the April-June quarter.

Back on September 3, the Ministry of Finance announced that capital spending in the April-June quarter had fallen 4.9%, for the first fall in seventeen quarters.

With that announcement, the April-June quarter became the first period showing a fall since July-September 2006, when GDP shrank by 0.1%.

Will capital spending pick up again? As the Ministry of Finance’s report showed, it was small and medium size firms that dragged down capital spending in the April-June quarter. We already know that consumers weren’t spending in July due to inclement weather, and we’re forced to wonder if small businesses might have followed suit…especially in August.

Nikkei: April-June GDP to be Revised Downward

Just yesterday, we speculated whether the unexpected drop in capital spending for the April-June quarter in Japan would translate into lowered expectations for revised GDP figures for that same quarter when the Cabinet Office announces them next Monday.

Back on August 13, the Cabinet Office announced in its preliminary GDP figure that GDP had grown 0.1% in the April-June quarter. However, this morning, the Nikkei announced that its survey of 13 private economists showed an expectation that revised GDP would come to -0.2%, for an annualized rate of -0.7%.

That pessimism, however, is not fully carried forward to the future. The Nikkei quotes Takahide Kiuchi of the Nomura Securities Financial and Economic Research Center as saying, “It is premature to say that capital spending will keep losing speed. Economic growth will slowly gain momentum from the July-September quarter.”

It’s a familiar tune. Hopefully we will actually get to hear it being played sometime soon.

Cabinet Office: Japan’s GDP up 0.1% in the April-June Quarter

Earlier this afternoon, the Cabinet Office released its estimates for GDP growth in the April-June 2007 quarter. The report shows that GDP grew 0.1% over that time (or, at an annualized pace of 0.5%).

According to the report, exports were canceled out by imports, and thus did not contribute to GDP growth for the first time since the same quarter last year, when they pulled GDP downward 0.1%. The gain registered in the more recent quarter was attributed to domestic consumption, which was up 0.4%, and capital spending, which was up 1.2%. Consumption of households, excluding rent, was up 0.3%. Private residential investment, however, was down 3.5% over the April-June period.

Private non-residential investment was up 1.2% and government consumption increased 0.3%.

State Minister for economic and fiscal policy Hiroko Ota was just shown from a press conference earlier today saying that the economy is still in a period of recovery.

I’m dropping my projection of a BOJ rate hike in August from 65% to 50%. As always, it will not be at 50% on the day the BOJ policy board meeting begins next week.

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