Annualized Growth of 1.5% in the April-June Quarter

1. The GDP statistics for the April-June quarter of 2005 (first preliminary figures due to be published on August 12) are expected to show positive real economic growth of 0.4% on the previous quarter (annualized rate +1.5%).

Not only have consumer spending and capital investment, the two major elements of domestic demand, have remained firm, but exports, which recorded a quarter-on-quarter dip in the January-March quarter, have also begun to recover, centering on shipments to the United States, Middle East and Central and South America, and the economy looks set to record positive growth for a third quarter in succession. In summary, the GDP statistics are likely to confirm that, as seen from the expenditure side, the Japanese economy is showing signs of escaping from its growth "plateau".

2. Movements of the Major Elements of Demand

(1) Consumer Spending (Real: +0.2% on Previous Quarter, +0.6% Annualized)

Following on from the sharp rise recorded in the January-March quarter, (equivalent to annualized growth of +4.6%), the GDP statistics are likely to show continued quarter-on-quarter growth of consumer spending in the April-June quarter. This is largely due to the recovery of spending by consumers in the mid-range income brackets as fears over employment and incomes have eased. A survey of expenditure by item reveals promising developments in areas such as (i) demand for leisure during the long stretch of consecutive public holidays, (ii) digital consumer electronics and personal computers (iii) seasonal goods (air conditioners, summer clothing, including "Cool Biz" clothing). Thanks to the introduction of many new models and sales promotion campaigns, car sales have also held firm.

(2) Housing Investment (Real: 2.4% on Previous Quarter, 9.1% Annualized)

Housing investment figures are likely to be down quarter-on-quarter for a second quarter. In the wake of the cut in the tax reduction on housing loans from January 2005, investment is peaking out, especially in the area of owner-occupied housing.

(3) Capital Investment (Real: +2.2% on Previous Quarter, +9.2% Annualized)

Following on from the January-March quarter, capital investment figures are set to show fairly strong growth of between 9% and 10% on an annualized basis. A number of major projects generated by (i) pent-up demand in the electric power industry (in fiscal 2005, capital investment by the industry is set to rise for the first time in 12 years), and (ii) capital investment in the media industry (TV studios, printing factories), are boosting investment figures but, basically, there is a growing shift of emphasis towards channeling part of the plentiful stock of money into investment with a view to increasing the sophistication of industry. The depth of demand for investment is steadily growing.

(4) Private Inventory Investment (Real: Contribution to Growth on Previous Quarter, 0.2 points)

Figures for private sector investment in inventory are set to record a quarter-on-quarter fall for the first time in three quarters. Thanks to a rise in shipments, a worsening of the problem of "unintentional inventory accumulation" that arose in the January-March quarter in capital goods among other sectors is likely to have been avoided. However, because (i) inventories of production goods are growing in the general goods sector due to the growth of production capacity in China and (ii) the volume of manufactured goods waiting to be laded remains at a high level as the bottleneck in marine transportation has not improved, the fall is likely to be a small one relative to the pace of inventory accumulation recorded in the second half of last fiscal year.

(5) Public Investment (Real: 0.5% on Previous Quarter, 1.8% Annualized)

Although the downward trend of public investment continues, the boost to demand provided by the fiscal 2004 supplementary budget (relating to recovery work after natural disasters, approved in February) is emerging and the rate of decline is likely to have slowed temporarily.

(6) Exports (Real: +2.3% on Previous Quarter, +9.6% Annualized)

Export figures are likely to see a recovery from the fall recorded in the January-March quarter. Shipments of cars and capital goods to the United States, the Middle East and Central and South America have been a major factor. However, the peaking of shipments to China and the EU countries that was the principal reason for the fall in exports in the January-March quarter continues. Moreover, if figures are analyzed on the basis of the January-June period with a view to offsetting the impact of delays in shipping, the annualized growth rate is +3.1%. Given the annualized rates of +19.3% and +6.6% achieved in the first and second halves of 2004, it appears that exports are slowing.

(7) Imports (Real: +1.2% on Previous Quarter, +5.1% Annualized)

Although imports of crude oil are weakening, import figures are set to record a quarter-on-quarter rise for an eighth consecutive quarter, thanks to (i) solid demand from the domestic private sector and (ii) the international division of labor coming into full-scale operation.

3. Looking to the future, the downside risk to the economy is likely to fall as pressures for structural adjustment recede. Against a backdrop of capital investment growth and improving employment conditions, the basic solidity of the economy is likely to grow. However, because exports, especially shipments to China and the EU countries, are expected to see little growth and progress on inventory adjustments in the materials and electronic devices sectors is slow, it is likely to be early autumn before any clear improvement in the economic trend is seen.

For more information on the content of this report, please contact: Makoto Ishikawa the Japan Research Institute, Limited.

Tel: 03-3288-4263
E-mail：ishikawa.makoto@jri.co.jp

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