Jan-Mar 2013 First Preliminary GDP Estimate

◆The first preliminary estimate of Jan-Mar 2013 real GDP (Cabinet Office) posted an advance of 0.9% q/q, annualized at 3.5%, the second quarterly positive growth in a row and surpassing the market consensus (+0.7%; annualized at +2.7%). Domestic demand saw the second quarterly positive contribution to q/q GDP growth in a row (+0.5 percentage points), while foreign demand saw the first positive contribution in four quarters (+0.4 points). In other words, well-balanced domestic and foreign demand drove real GDP. Behind the higher-than-expected growth of real GDP was a larger-than-expected contribution of foreign demand, as exports and imports respectively overshot and undershot expectations.

◆Personal consumption, exports, and other major demand components saw steady growth in general. However, capex declined 0.7%, the fifth quarterly slide in a row and falling short of market expectations of turning around to positive growth, evidencing that companies are maintaining a cautious attitude toward capex despite a likely improvement in the environment, such as improved earnings and increased exports.

◆The ongoing uptrend in GDP is likely to continue in Apr-Jun and beyond, moving toward fullfledged recovery. Exports have finally shown signs of bottoming out and are very likely to move toward an uptrend, supported by an improvement in the US and Asian economies, and given that benefits from a weaker yen since end-2012 will start to materialize. Although capex did not increase in the Jan-Mar GDP estimate, higher corporate earnings and production driven by higher exports should give rise to capex going forward. At the same time, the improvement in corporate earnings should have positive effects on the environment surrounding household income, supporting personal consumption. Thus, we expect balanced growth to be seen among the household sector, corporate sector, and foreign demand in Apr- Jun and onward. We anticipate that the economy will likely gradually gain momentum in FY13, supported by such a cyclical recovery and other factors, including (1) public investment as decelerated to some extent but is very likely to accelerate again reflecting approval of the FY12 supplementary budget by the Diet at end-February 2013, and (2) personal consumption and housing investment will probably see forward-loaded demand emerging toward end-FY13, prior to an expected tax hike in April 2014.