Japan’s GDP result for the last calendar quarter of 2014 showed that Japan exited recession, but only at a 2.2% annualized quarterly rate, much lower than what consensus was expecting. This does not mean, however, that we should all jump into lifeboats.
As always, and as reported in November, there are important things to know about these statistics:
Firstly, these statistics often get heavily revised and it would not be shocking to see the most recent quarter revised up further, especially as there were several anomalies in the data. In particular, the main disappoint was in personal consumption. The household survey by the Ministry of Internal Affairs and Communications suggested a 6.8% annualized quarterly figure, but the result was only 1.3%, so there are strong grounds for expecting an upward revision. Another anomaly was the "discrepancy factor" (the difference between the sum of the real components and total real GDP) which leapt to an even larger negative number and means that GDP is likely even more understated. Lastly, real (inflation adjusted) inventories fell less than the prior quarter, and thus, added to GDP in the 4Q , but they continued to decline, which means that Japan has reduced real inventories for sixteen of the twenty quarters since 2009 began, with a hugely negative accumulated result since then, while the economy has expanded 5% since that time. This clearly seems to understate GDP growth in our view.
Secondly, GDP statistics have no correlation with corporate profits in Japan. As our Evolving Markets reports have long-shown, despite lackluster GDP, Japanese corporate profits have been quite strong in the last 10 years, with the trend clearly continuing in 2014, evidenced by profit margins strongly exceeding those even during the 1980s bubble. Of course, the weaker yen played some role in this recent trend, but service sector profits were also very strong.
Thirdly, the good news is that all of the commentators who had despaired over how unit exports were not growing despite the weaker yen, are further assuaged as such are now growing even more strongly than in the third quarter. Indeed, Japan’s net trade contributed strongly to GDP this last quarter.
As for the outlook, real inventories should build in future quarters, which should boost GDP quite significantly, in our view. Personal consumption and capital expenditure should rebound, as well. We do not believe that net trade will contribute much further, and may even subtract slightly from growth, but in sum, we expect about 2% average quarterly annualized growth in the coming quarters, with perhaps a quite strong current quarter, leading to a 1.6% YoY level growth in 2015. In sum, as before, the disappointing economic data should not worry investors in Japanese risk assets very much at all. Indeed, it certainly has not bothered investors so far, as TOPIX has risen quite smartly since the first GDP report for the 3QCY14 reported that Japan was in “technical recession.”