Annualized Growth of 4.3% in the October-December Quarter; Growth for Full Year Set to Top 3%

The real GDP statistics for the October-December quarter of 2005 (first preliminary figures due to be published on February 17), are likely to show positive growth of 1.1% on the previous quarter (equivalent to an annualized rate of +4.3%), indicating that the economy has accelerated since the July-September quarter*1. Owing to the dip in the October-December quarter of 2004*2, it is highly likely that GDP growth was as high as +3.7%.

*1: Owing to the seasonal adjustment made each quarter following the publication of the quarterly estimates, the figures for July-September 2005 are likely to be revised upwards to +0.4% on the previous quarter, equivalent to an annualized rate of +1.5%. (Cabinet Office figures released on January 31 show a 0.2% rise on the previous quarter, equivalent to 1.0% on an annualized basis.)
*2: In the October-December quarter of 2004, real GDP rose by 0.4%. The dip in consumer spending due to the mild winter and natural disasters kept growth low in comparison to the +2.4% registered in the July-September quarter of the same year and to the +1.4% registered in the following January-March quarter.

One reason for this high growth in the October-December quarter, amidst a range of structural pressures for adjustment, is the action of a virtuous circle in which strong exports and capital investment boost corporate profits, bringing a recovery of employee incomes and a continued upward trend in share prices, which leads to a rise in demand from the household sector, which in turn boosts corporate profits still further. This virtuous circle has helped to offset the negative impact of the rise in the price of crude oil. Another factor that helped to boost the growth rate is the fact that imports, which have seen sharp short-term fluctuation in recent months, remained virtually stable during the October-December quarter.

Movements of the Major Elements of Demand and the GDP Deflator

(1) Consumer Spending (real: +0.6% on previous quarter, +2.3% annualized)

The statistics are likely to show that consumer spending has remained firm. Against the backdrop of a continued recovery in employee incomes, the rapid rise in domestic share prices appears to have stimulated household propensity to spend. As of December, the most severe cold wave since the Second World War has boosted consumption and thereby the economy, by stimulating sales of cold weather clothing and heating equipment. However, there is still some variation in sales trends by product. In the higher-priced goods sector, for instance, flat-screen TV sets and branded goods have performed well, but sales of passenger cars have remained sluggish, continuing the trend recorded in the July-September quarter.

(2) Housing Investment (real: +2.9% on previous quarter, +12.1% annualized)

Housing investment is likely to have risen, quarter-on-quarter, for a second quarter. This will be the first time that housing investment has recorded two-digit annualized growth rate since the October-December quarter of 2000. It is likely that the overall figures have been boosted by a rise in the construction of housing for rent, against the backdrop of an influx of investment money into the real estate market. However, the downward trend in the construction of detached houses continues and the figures for construction starts in December suggest that the upward trend in construction of housing for rent and for sale is also slowing. Following the scandal over the falsification of earthquake resistance data, it is likely that the market trend will be on the cautious side from the January-March quarter onwards.

(3) Capital Investment (real: +2.4% on previous quarter, +9.8% annualized)

The growth of capital investment is likely to have accelerated slightly since the July-September quarter, so that capital investment will have risen quarter-on-quarter for a seventh consecutive quarter. Although the boost provided by major redevelopment projects in city centers is tailing off, investment is beginning to rise in a number of areas, including (i) the development of more sophisticated products and entry into growth markets in manufacturing industry, (ii) the renewal of distribution infrastructure in the electric power industry in, (iii) the building of fiberoptic networks in the telecommunications industry, and (iv) an expansion of investment in IT by financial institutions.

(4) Public Investment (real: –3.2% on previous quarter, –12.2% annualized)

The statistics are likely to show a reaction to a temporary slowing of the downward trend in the first half of fiscal 2005, caused by the implementation of restoration projects following natural disasters. The projected two-digit fall will be the first since the July-September quarter of 2004.

(5) Net Exports (real: contribution to growth on previous quarter: +0.4 points, annualized contribution: +1.8 points)

Exports are likely to have seen two-digit annualized growth for a third quarter in succession (growth of 3.2% on the previous quarter, equivalent to an annualized rate of +13.5%). Although shipments of capital goods to Asia (excluding China) are likely to have weakened slightly, shipments to China and to the oil-producing countries and other exporters of natural resources continue to rise, and exports of automobiles to the United States, which weakened in the July-September quarter, have seen a sharp recovery.
Meanwhile, the level of imports is thought to have been largely on a par with the previous quarter, rising by 0.1% on the previous quarter (equivalent to annualized growth of 0.2%). Basically, although the general growth of imports has continued as domestic demand has recovered and the international division of labor has come into full operation, the October-December quarter has seen a reaction to the sharp rise in imports of airplanes and personal computers in the July-September quarter, which has sharply depressed overall figures.
Under these conditions, the contribution of net exports to the economic growth rate is likely to have seen its largest rise since the January-March quarter of 2002.

(6) GDP Deflator (change on same quarter in previous year: –0.4 points)

The downward trend of the GDP deflator, year-on-year, is likely to have accelerated by 0.2 points as compared with the July-September quarter. The two main reasons are (i) the continuing high level of the price of crude oil (a rise in the import deflator), (ii) the sharp fall in the price of fresh food (a fall in the consumption deflator, due in part to a reaction to the sharp rise in the price of vegetables in 2004).

Looking to the future, although the Japanese economy is unlikely to continue to achieve the high rate of growth seen in the October-December quarter, and although it will be necessary to keep a watch on the trends of overseas economies (especially that of the United States), the Japanese economy is likely to see a continued recovery, thanks to the mechanism of the virtuous circle described earlier. If the stockmarket continues to recover from the "Livedoor Shock" as it has done so far, it is likely that the positive impact of the rise in share prices will offset the negative impact of the rise in the national burden as resulting, among other things, from the halving of the fixed rate income tax reduction.
On the basis of this forecast of GDP statistics for the October-December quarter, assuming similar figures for the January-March quarter, the real economic growth rate for fiscal 2005 is set to reach +3.1%.

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

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E-mail：ishikawa.makoto@jri.co.jp

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