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Economy in Brief

Japan's GDP declines in 2022-Q1
by Robert Brusca  June 8, 2022

Japan's GDP contracted by 0.5% annualized in the first quarter of 2022. That puts the four-quarter growth rate at 0.7%, only slightly stronger than the same growth rate for the fourth quarter, which registered a 0.4% gain. GDP growth in Japan continues to simmer down after the stellar 7.4% 4-quarter growth rate posted in the second quarter of last year as the GDP comparisons for four-quarter growth was with a COVID interrupted period of a year-ago at that time. The annualized quarter-to-quarter growth rates show steadier performance.

Private consumption in the first quarter rose by 0.2% (annualized), a sharp step back from the 10.1% annual rate that it logged in the fourth quarter. Still, private consumption is up 2.1% year-over-year, better than the 1.3% pace logged in the fourth quarter.

Public consumption in Japan rose at a 2% annual rate in the first quarter after falling by 1.1% pace in the fourth quarter of last year. Public consumption has been solid since 2021-Q2 when it grew at a strong 3.2% pace followed by a 4.5% annualized rate in Q3. The second and third quarters of last year relied on government spending to stabilize the economy after a pullback of -3.0% annualized in 2021-Q1. Year-over-year public spending has been steady and strong at growth rates ranging from 3.4% to 2.0% since 2020-Q4; the only exception was the weak 0.9% four-quarter gain in 2021-Q4

Gross fixed capital formation in Japan continues to be challenged; it fell at a 5.7% annual rate in the first quarter, marking the third quarter in a row with that series declining. There are negative four-quarter growth rates for gross fixed capital formation in five of the last six quarters. Capital spending is weak and uneven in Japan in the face of a difficult international trade environment. Confidence simply does not seem to be present.

Spending on housing continues to fall in the first quarter, marking the third straight quarter-to-quarter negative growth rate. The Q1 contraction is at a 4.8% annual rate; it's a faster contraction than the -4.5% logged in the fourth quarter although not as severe as the -6.6% contraction logged in the third quarter of last year. Housing is another sector that continues to be challenged with year-over-year growth rates negative in five of the last six quarters.

Exports grew at a 4.6% annualized rate in the first quarter (annualized) but were dominated by imports that grew at a 13.9% annual rate - this mix generated a negative contribution to GDP from net exports. Export growth is up at a 4.6% annual rate over four-quarters but has slowed steadily from its 27.1% pace in the second quarter of last year. Imports log a four-quarter growth rate at a 7.2% annual rate in Q1 of 2022. The year-on-year import trend is a bit muddier than the trend for exports. But exports have steadily outpaced imports on growth over 4-quarters until this report.

Domestic demand in Japan is satisfactory at a 1.2% annual rate quarter-over-quarter; it is down from the 3.6% pace logged in the fourth quarter in terms of quarterly growth rates. Domestic demand has positive growth in three of the last five quarters in quarter-over-quarter comparisons. Year-over-year growth rates for domestic demand show a 1.2% pace in the first quarter and that's up from 0.3% in the fourth quarter and 0.6% in the third quarter of last year, but that gain is shy of the four percent pace logged in the second quarter.

Japan continues to show that it is trying to establish growth in the wake of the disruption from COVID and in the midst of globally difficult times faced with a war between Russia and Ukraine, lingering supply side effects and its most important trade partner, China, still struggling because of its dedication to a policy of Zero COVID infections. Japan's imports are strong reflecting energy demand much more than domestic demand since domestic demand rose by only 1.2% at an annual rate in the first quarter and public demand remains as the principal aspect of domestic demand growth with private demand up by just 0.2% annualized. Capital formation continues to be challenged in Japan for gross fixed capital, for plant and equipment spending, and for housing investment.

Industrial production in Japan continues to struggle with overall output down in each of the last two months; but manufacturing output is down only in one month, April, after a minor increase in March. Total industrial production is on the upswing showing net growth in output over the last three months and six months. Japan's inflation has been much better-tempered than in most G-10 countries. Still, Japan's inflation rate is not normalizing; it has crept up mostly in the wrong places. Japan's growth outlook continues to be uncertain the global economy experiencing various pressures and with the yen steadily falling back to ever weaker levels. The weaker yen will be good for exports; however, it's not good for domestic consumption and a weak yen will make Japan's energy imports even more expensive.

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