Japan’s GDP growth will fall again in Q4 in spite of growing export economy, says analyst

Exante’s senior analyst, Victor Argonov says that whilst Japan’s third quarter GDP growth paints a strong rebound of the Japanese economy – its economy expanded by 21.4% quarter on quarter, the highest rate recorded since 1980, it’s worth noting that in the preceding quarter, its annualised GDP growth set an anti-record – collapsing to -28.8%. Therefore, quarter four growth is not likely to be as good.

Victor Argonov, says: “Japan’s real GDP is still way below its pre-Covid size. Given that Japan’s economy had also shrunk by 0.6% quarter on quarter in 1Q, Japan’s economy at the end of September was still 3.9% smaller than at the end of 2019.”

“The breakdown of GDP by expenditure shows that net exports and consumer spending were the main locomotives of growth in 3Q. Exports were up 7% quarter on quarter, following a 17.4% quarter on quarter contraction in 2Q. We calculate that the increase in net exports accounted for nearly 3ppts out of the 5% growth in GDP in 3Q. Expansion in household consumption was responsible for the remaining 2ppts,” adds Mr Argonov.

“The most recent foreign trade statistics have also been relatively upbeat. October exports were only 0.2% lower than in October 2019, which marked a substantial improvement vs the September reading of -5%yoy. The improvement likely reflects the recovery in external demand for Japanese products. What are the reasons for the quick recovery in export demand, and will it last?”

“The return of demand strength in Asia is an apparent reason why Japanese exports have been doing well and driving the country’s economic recovery. The Chinese economy is on track for posting positive growth this year. Before the Covid pandemic, China used to consume nearly 20% of Japan’s exports. Other Asian countries (South Korea, Hong Kong and Thailand) also were among top five destinations for Japanese exports, with the shares of 7.1%, 4.7% and 4.4% (source: UN Comtrade). If Vietnam, Singapore, Indonesia and Australia are included in the group, it turns out that Japan would generally send more than 45% of its exports to it,” he adds.

“It is worth noting that motor vehicles are the largest item of Japan’s exports (13.4%), with auto parts and accessories accounting for another 5%. In this context, the rapid recovery of auto demand in China, where auto sales were up 12.4% year on year in October, should ensure further growth in Japan’s automotive exports in the coming months,” says Mr Argonov.

“Japan’s exports to China increased by 10.2% year on year in October. Looking at the breakdown, we see that the fastest-growing items included cars, plastics, and also the equipment required to manufacture semiconductors,” says Mr Argonov.

“However, while export-oriented sectors of Japan’s economy seem to be on track for fast recovery, those based on face-to-face client interaction may be not entirely out of the woods. Just like the UK and the EU, Japan has distinct seasons and is located in the Northern hemisphere. For this reason, there is a risk that Covid-19 cases will rise during the regular flu season it is currently entering. Also, the third wave of Covid-19 affecting the country may dampen consumer confidence. For this reason, GDP growth numbers in 4Q are unlikely to look as stellar as the 3Q ones,” he concludes.