Apr-Jun 2013 First Preliminary GDP Estimate

◆The first preliminary estimate of Apr-Jun 2013 real GDP (Cabinet Office) posted an advance of 0.6% q/q, annualized at +2.6%, the third quarterly positive growth in a row but short of market expectations (+0.9%; annualized at +3.6%). Behind this was a q/q slide in capex despite expectations of a turnaround, as well as a significant negative contribution of inventories.

◆Domestic demand saw the third positive contribution to q/q GDP growth in a row (+0.5 percentage points), while foreign demand saw the second positive contribution in a row (+0.2 points). Real GDP continues to grow supported by balanced domestic and foreign demand. In addition, as the major factor pulling down real GDP was a slide in inventories, the lower-than-expected growth was not as bad as at first glance. Nevertheless, the Apr-Jun GDP result holds the key to determine whether the consumption tax will be raised as planned. We expect the hike to occur as scheduled.

◆The ongoing uptrend in GDP is likely to continue in Jul-Sep and beyond. Although risk of a downswing in the Chinese economy warrants monitoring, exports are likely to maintain an uptrend, supported by improvement in overseas economies, centering on the US, and given that benefits from a weaker yen since end-2012 will materialize. The improvement in corporate earnings driven by higher exports should have positive effects on household income, supporting personal consumption. Although capex has stagnated, higher earnings and improved sentiment should give rise to capex. We anticipate the economy gradually gaining momentum in FY13, supported by such a cyclical recovery and other factors including (1) public investment accelerating again reflecting execution of the FY12 supplementary budget, and (2) personal consumption and housing investment seeing forward-loaded demand emerging toward end-FY13, prior to the expected tax hike in April 2014.