Japan’s GDP Slips in Q3

GDP in Japan fell by 1.2% at an annual rate the third quarter after rising 4.6% at an annual rate in the second quarter. Year-over-year growth in GDP still progressed, rising to 1.9% in the third quarter compared to a year-over-year gain of 1.6% in the second quarter. The year-over-year calculation benefits from a data quirk that finds the third quarter one year ago simply much weaker than this third quarter in 2022. The effect of that is to cause year-on-year growth to benefit despite the growth slide in Q3 of 2022 – even though that seems counter-intuitive. It is counter-intuitive, but it is also arithmetic. The change in the year-over-year growth is being driven by the shift in the base period much more than the new data release of today.

Quarter-to-quarter growth Private consumption slowed sharply in the third quarter from a 5.1% annualized quarterly rate from a 1.1% rate in the third quarter. Public consumption also slowed from a 3.4% annual rate of expansion in Q2 to being flat in Q3. The slowdown with consumption spans both the private sector and the public sector at the same time and both slowdowns were quite significant. Fixed capital formation also slowed, falling to a 4.8% annual rate pace in the third quarter from a 6% pace the quarter before plant and equipment spending slowed its 6.3% pace from a 9.9% annual rate the quarter before. Housing contracted, falling at 1.7% annual rate but that was actually an improvement from a 7.4% annual rate fall in the second quarter.

On the trade front, exports improved to a 7.9% annual rate of growth after a 7.2% growth rate in the second quarter; imports however had only grown by 3.3% at an annual rate in the second quarter but surged, gaining 22.6% at an annual rate, in the third quarter helping to drive the trade account into deficit.

Domestic demand in Japan slowed to 1.4% annual rate from a 3.9% pace in the second quarter.

The quarter-to-quarter slowing of the economy is pervasive with slowing in most of the categories, exports are an exception and housing is another exception; although housing investment declined it declined by less than it had in the second quarter. Consumption was especially weak in the third quarter- Domestic demand slowed yet imports surged by 22.6% at an annual rate, a sharp increase in import demand particularly with domestic demand slowing.

Year-over-year data quirks drive an improvement The picture from year-over-year growth in Japan is quite different from the quarter-to-quarter results. Most categories in GDP show stronger growth in Q3 than in Q2 on a year-over-year basis. Looking at year-over-year growth, the consumption picture is mixed with private sector consumption speeding up to a 4.3% pace from a 3% pace. The second quarter saw public sector consumption slowing to 0.9% pace from a 2.1% pace in Q2.

Capital spending picks up the third quarter compared to the second quarter on a year-over-year basis: gross capital formation rises by 0.9% after falling 2.8% in the second quarter; plant and equipment spending rises at a 4.2% annual rate after edging ahead by just 0.2% year-over-year in the second quarter. Housing declines in the third quarter falling at a 4.9% annual rate, but that's an improvement from the 6.2% annual decline in the second quarter continuing the theme of improved quarter-to-quarter performance in the year-over-year growth rates.

On the trade front exports expand at a 5.6% annual rate year-over-year after slipping to a 2.9% annual rate in the second quarter; imports rise even more strongly at a 10.6% annual rate after a 3.8% annual gain in the second quarter.

Domestic demand rises to 2.9% in Q3 after a 1.8% increase in the second quarter in the year-on-year framework

The year-on-year surprise Year-over-year results are somewhat curious since the base for the third quarter year-on-year calculation gets weaker, the year over year numbers improve instead of decay. The reason for that is the base of these calculations which is the third quarter of 2021 saw extreme weakness in GDP on a quarterly basis one year ago with GDP falling 2.5% in that quarter and other components are showing weakness as well. As a result, the weakness that is posted and Q3 of 2022 is actually less than the weakness that occurred a year ago and that drives the year-over-year growth rate stronger. In this case the year-over-year numbers are misleading in terms of what's going on with the economy even though we often prefer to look at year over year numbers as being smoother and more indicative than quarterly numbers. Not so this quarter in Japan…

Summing up GDP has been slowing and inflation has been rising on a global basis. Japan simply fits into the picture that the rest of the world is part of. Japan's inflation rate is less pronounced than what we see in the US or in Europe but inflation in Japan also has risen and it's up above the 2% mark. Japanese GDP declining in the third quarter is different from the US where GDP has posted growth, but the US had two negative quarters to start the year even though it didn't fall into recession (yet). Growth continues to be challenged globally, although Japan should have some benefit from the extreme weakness in the yen. The problem has been that whatever gains Japan has made in exports they have been swamped by energy needs and the imports of oil occur amid extremely high oil prices. There is some relief from that on the way but even that might prove temporary. Longer term, Japan is re-starting some nuclear plants. The oil situation continues to be difficult on global markets as OPEC has continued to press to keep oil prices high and Europe is scrambling in the natural gas market to line up new sources despite an infrastructure that makes LNG hard to offload to European ports of call. But all this demand tends to support prices.