Japan's GDP Beats Expectations Even as Net Exports Are Weak

Private consumption in the first quarter rose at a 2.4% annual rate quarter-to-quarter, the strongest since the second quarter 2022. Public consumption was flat, presenting its weakest performance since the fourth quarter of 2021 when it fell.

Gross fixed capital formation rose at a 4.6% annual rate in the first quarter, after a decline at a 2.6% annual rate in Q4. Plant and equipment spending increased at a 3.8% annual rate quarter-to-quarter after falling at a 2.6% pace in the fourth quarter. Housing investment crept ahead at a 0.7% annual rate just slightly ahead of the 0.6% pace logged in the fourth quarter of 2022. Still, the last two quarters of residential investment represent reversals from a string of declines in previous quarters.

GDP net exports deteriorated slightly with the erosion in the deficit expanding slightly in the first quarter after rising slightly in the fourth quarter. Exports fell at a sharp 15.6% annual rate quarter-to-quarter while imports fell at a 9% annual rate in the quarter. With both flows declining, the decline in exports dominated the picture and resulted in the weaker trade performance overall.

Domestic demand for Japan rose at a 2.8% annual rate in Q1 after declining at a 1.6% annual rate in the fourth quarter 2022.

Year on Year trends Japanese year on year trends show capital investment driving GDP the most among components with gross fixed capital formation up at the 3.2% annual rate. Planted equipment spending was up at a 3.9% annual rate, although those two investment components are offset somewhat by residential investment where spending fell at a 1.9% annual rate. Private consumption spending rose at a 2.5% annual rate while public consumption was up at a 0.9% annual rate, contributing less than it had in the fourth quarter of 2022. Year-over-year the trade picture continued to deteriorate as it did on a quarterly basis, subtracting slightly from GDP. Year-on-year exports were up at a 1.7% annual rate, but imports were up at a stronger 4.1% annual rate, causing deterioration in the trade position.

Japan's domestic demand rose by 1.7% year-over-year as GDP rose at a 1.3% pace year-on-year.

Japan's inflation continues to be slightly overcooked, however, after a long period of suffering through deflation, monetary officials are not concerned about it nor are they convinced inflation is going to remain heated. Japan’s inflation is significantly less than the inflation being faced in the US and in Europe.

Japan's trade picture reflects the slowing in the global economy with its exports weaker both quarter-to-quarter and year-over-year. The gain in its GDP is blunted somewhat by stronger imports and the deterioration in net exports to which they contribute. Some of Japan’s stimulus leaks out to the global economy though its trade deterioration. Overall, the quarter's performance is slightly better than expected. Annual growth rates in the post-Covid period continue to outperform the growth that Japan had been posting in the pre-Covid period. Japan’s economy is doing slightly better and its flirtation with deflation has been put to an end. But Japan still has a declining population, a large stock of public debt and a central bank that is still buying government bonds hand over fist. Japan still faces many policy challenges.