Japanese GDP growth slowed to 0.1% quarter-on-quarter (q/q) in the third quarter, from an upwardly revised 0.4% q/q growth in the second quarter. This was weaker than both our and consensus expectations.
What were the key drivers of slower growth?
The key drags to growth were net exports and inventories. The drag from net exports of 0.2 percentage points (pp) continued the trend from last quarter, which was expected given weak global trade. However, the inventory drag of 0.3pp was larger than expected.
Domestic demand slowed but remained positive, contributing 0.3pp to growth (from 0.7pp last quarter). The major drivers of domestic demand, household consumption and private-non residential investment (capex), contributed 0.2pp each. Government spending also contributed positively to growth.
Why weaker domestic demand bears monitoring
Third quarter activity was boosted by consumption brought forward ahead of the October value added tax (VAT) hike. In particular, there was a sharp jump in September retail sales. However, taking a step back, private consumption in the third quarter was broadly weaker than we had anticipated.
This either reflects a weak Japanese consumer or the success of Japanese authorities to smooth demand ahead of the October tax change. With low wage growth and weak consumer sentiment, we fear the former. Nonetheless, the magnitude of the fall in domestic demand in the fourth quarter will create a clearer picture of the underlying Japanese economy.
What does this mean for monetary policy?
The Bank of Japan (BoJ) will have likely been breathing a sigh of relief following the recent positive developments in the US-China trade war, and as the yen has remained fairly stable. However, the underlying growth and inflation environment remains very weak.
We believe that the primary concerns for the BoJ will move from the external outlook to the domestic economy. As such, we maintain our view that the central bank will cut interest rates in December, although this will do little to support economic growth. Meanwhile, the Japanese government is considering further fiscal stimulus to support long term growth.