Japan: Prospect of strong 2.2% q-q annualized growth in Q1 - Nomura

Analysts at Nomura expect q-q annualized rise of 2.2% for Q12017 real GDP, annualized (up 0.5% q-q) of Japan which are scheduled for release on Thursday 18 May, a fairly high level of growth.

Key Quotes

“We think that in addition to recovery in external demand continuing from 2016 H2, some components of domestic demand were also broadly solid.”

“We think external demand and consumer spending were the main factors supporting growth

• Exports recovered from 2016 H2, and we think this recovery continued in Jan-Mar 2017. Real exports on a trade statistics basis (adjustments for inflation and seasonality by Nomura) rose 2.0% q-q in 2017 Q1, rising for a broad cross-section of countries and regions. The increase in exports to Asia was particularly large, and we think this may be attributable to a cyclical demand increase for construction machinery and smartphones in Asia. 
• We also think domestic demand was largely robust. The Jan-Mar average for real consumer spending (excluding housing) from the Family Income and Expenditure Survey rose 1.1% q-q, and we think this suggests GDP-basis consumer spending was strong. We identify buoyant consumer sentiment since the start of the year as a key factor here. We also expect housing investment and public investment to have risen. We think the start in January of construction for the Olympic village for the 2020 Tokyo Olympics and Paralympics will have given housing investment a boost. 
• While we expect a decline in capex, we view corporate caution on capex as only temporary. The BOJ March Tankan survey showed a FY17 fixed investment growth forecast (including software investment, excluding land purchasing expenses) at the highest level for a March Tankan since 2007. The survey of production forecasts in the April industrial production statistics indicated an expected 21.9% increase in capital goods (ex transport equipment) average output in Apr-May versus the Jan-Mar average. This is a large increase. While a large amount of this output may be destined for export, still we think it suggests potential for increased capex going forward.” 

“Key point to watch is whether recovery in external demand will foster sustained growth in domestic demand

We think Jan-Mar real GDP was favorable overall. We also think that the recovery in external demand from 2016 H2 may have fed through to domestic demand. However, we caution that the solid expansion in external demand will not continue forever. We think a key focus from here is how long growth in external demand will continue and whether domestic demand can remain solid if external demand slows.”