Oct-Dec GDP: Abe should use results to legitimize his policies

Feb. 14, 2013, 12:30 JST

Summary of the Q4 GDP results: Weak corporate investments


Japanese economy contracted slightly by 0.1% quarter on quarter (QoQ) in the October-December quarter (Q4) of 2012. The result was slightly weaker than the prior market expectation (+0.1% QoQ). 

The mail weakness came from private investment into capitals and inventories, who together pulled down the overall GDP growth by 0.5% points. Net export contributed negatively by 0.2% points. In comparison, there were strong demand from Japanese household and public sector. Private consumption grew by 0.4% QoQ, contributing 0.3% points to the overall growth. Public consumption and investment together contributed by 0.2% points. 


Japan suffered 3 quarters of negative growth



Source: Cabinet Office, CEIC, JMA.


Policy implication: 

PM Abe should use the results to trumpet the legitimacy of his policies

Prime Minister Mr. Abe only came into power on December 26th and his policies are certainly not to blame for the negative growth in Q4. Rather, PM Abe can use the results to legitimize his policies. He can stress on the need for public spending to offset the deflationary pressure and the need to adopt policy measures to encourage private sector investments. To overseas policy makers, he should point out that net export has been massively dragging down the growth for the past 2 years and it is only natural that yen should weaken in the light of trade deficit and rising overseas interest rates. Net export has pulled down the Japanese growth by as much as 0.9% points in both 2011 and in 2012, and for a country with a potential growth less than 1%, the drag is a critical problem. 


Net export and capex have been major negative contributors to growth


Source: Cabinet Office, CEIC, JMA.


Deflationary pressure still strong in Japan

GDP deflator improved moderately from -0.8% year on year (YoY) in July-September quarter (Q3) to -0.6% YoY in Q4. The BoJ does not have a specific target for the GDP deflator, but assuming it lies somewhere between 1-2%, the bank still needs to lift GDP deflator by full 2 % points. While the BoJ has a preference for gradualism and it probably prefers to spend 2-3 years to achieve reflation, the bank should keep in mind that a severe recession can undo their gradual reflation efforts in just a few quarters and put Japan back in a severe deflation again. In our view, gradual reflation is a wrong policy direction. The bank should adopt a policy so that the reflation should be achieved in 1-2 year time frame, rather than 2-3 years.


Source: Cabinet Office, CEIC, JMA.

Source: Cabinet Office, CEIC, JMA.