Japanese GDP Gets a Boost From Inventories

A better-than-expected first quarter GDP report in Japan is largely a function of an inventory build, but consumers and businesses are spending again and that also helped propel growth.

Stronger Growth…With a Few Qualifications

The Japanese economy grew at a 2.4 percent annualized rate in the first quarter, beating consensus expectations. Growth was fairly broad based, although there was a slight drag from net exports. Exports actually grew at a 9.9 percent annualized rate in the quarter, but that was outpaced by imports, which grew at a 12.0 percent clip as strong consumer spending helped increased demand for foreign goods.

Consumer spending was a key driver of the outperformance in the quarter, adding 0.8 percentage points to the top-line figure. While we were counting on better consumer spending in the first half of the year (see our recent special report, “Room For Growth in Japanese Consumer Spending”), we expected it to show up more in the second quarter when real wages begin to pick up as modest nominal wage gains are flattered by a lower inflation rate. On a nominal basis, Japanese retail sales fell two out of three months in the first quarter. It may be that spending on services explains the strength of private outlays in the context of such weak retail sales. Business spending and government spending picked up slightly as well, with each adding a tenth of a percentage point to overall growth.

While we are encouraged by the better-than-expected report, there are a couple of things that take the shine off the apple. The first is the fact that the largest positive contributor in the quarter was inventory growth, which added 1.8 percent to the headline figure. When inventory accumulation is your engine for growth, you might be in for a short ride. In this case however, the increase in stockpiles follows three straight quarterly declines. Given the fact that it comes against the backdrop of stronger consumer spending, we are not presently worried about bloated inventories.

The other concern is the strange pattern in which, for three straight years, we have seen a surge in first quarter growth only to be followed by disappointment in the subsequent quarter. From 2012-2014, the average first quarter growth rate in Japan was 4.9 percent; the same figure for the second quarter was -2.0 percent. For 2014 at least, this can be attributed to the consumption tax, but 2012 and 2013 saw a much better performance in the first quarter as well.

Implications for the Bank of Japan

TheBank of Japan (BoJ) increased the pace of its quantitative and qualitative easing program (QQE) in October 2014 such that the monetary base is expected to increase by ¥80 trillion annually. At the time, the BoJ said that it “will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.” Today’s report shows a Japanese economy that is not too hot and not too cold. That is just right for the BoJ to remain on hold.