Kavan Choksi on Japan’s Downgraded Q4 GDP on Service Sector Weakness

Kavan Choksi has recently noted that Japan's economic rebound was softer than expected in the final quarter of 2021, as the increase in business and consumer spending was weaker than previously reported.

The revised growth rate is bad news for policymakers tasked with keeping the country's fragile recovery on track. Kavan Choksi believes it is primarily because of rising commodity prices due to the Ukraine crisis and persistent supply disruptions that heightened economic uncertainty.

According to the Cabinet Office's revised data, Japan's GDP expanded by 4.6 percent year on year in October-December, lower than the 5.6 percent gain predicted by economists and the 5.4 percent preliminary reading released last month. Kavan Choksi has argued that it suggests that Japan's economic recovery from the pandemic is weaker than that of Europe and the US.

Quarterly, GDP increased by 1.1 percent, falling short of the median market expectation of 1.4 percent growth. According to a government official speaking at a press conference, the change was primarily due to decreased private consumption.

Private consumption increased 2.4 percent from the previous quarter, down from an estimated 2.7 percent increase. More particularly, spending in the service sector was reduced from a 3.5 percent increase to a 3.1 percent increase. In addition, according to the official, spending on services such as restaurants and train rides was lower than the preliminary estimate based on private-sector figures.

Private consumption was likely relatively weak in January due to soft spending on capital goods such as cars and services as the renewed uncertainty surrounding Ukraine dampened business investment. In addition, capital expenditure increased by 0.3% in the fourth quarter, falling short of economists' expectations of a 0.7% increase and a preliminary figure of a 0.4% increase.

While previous data showed robust fourth-quarter business spending, the revised GDP figures reflected weakness in items such as software investment. As a result, domestic demand contributed 0.9 percentage points to revised GDP figures, while net exports contributed 0.2 percentage points.

The Reuters poll forecast annualized growth of 0.4 percent in the January-March quarter, slashing previous estimates due to Omicron coronavirus and uncertainties caused by the Ukraine conflict. According to Yusuke Shimoda, economic growth will be positive in the first quarter. Nevertheless, it's still early March, so it is best not to rule out additional downside risks depending on Russia's actions.