Jul-Sep 2013 First Preliminary GDP Estimate

◆The first preliminary estimate of Jul-Sep 2013 real GDP (Cabinet Office) posted an advance of 0.5% q/q, annualized at +1.9%, the fourth quarterly positive growth in a row and overshooting the market consensus (+0.4%; annualized at +1.7%). The major factor behind the overshoot was a larger-than-expected positive contribution of inventories (+0.4 percentage points). Other demand components were almost on par with expectations in general.

◆Domestic demand saw the fourth positive contribution to q/q GDP growth in a row (+0.9 points), while foreign demand saw the first negative contribution in three quarters (–0.5 points) due to a slide in exports. In other words, a slide in foreign demand held down GDP growth.

◆The ongoing uptrend in GDP is likely to continue in Oct-Dec and beyond. Personal consumption has driven the economy and is likely to maintain an uptrend, reflecting a possible improvement in income conditions. In addition, as last-minute demand is likely to surge in advance of the April 2014 consumption tax hike, personal consumption is likely to gain momentum toward end-FY13, driving GDP growth. Meanwhile, while exports turned to decline in Jul-Sep, they will likely return to an uptrend due to stronger export competitiveness reflecting a weaker yen, and also owing to expansion of overseas economies centering on the US. Reflecting higher exports and steady domestic demand, the ongoing improvement in corporate earnings is likely to continue, and hence, in turn, the current uptrend in capex should be maintained. Meanwhile, public investment is likely to remain at a high level for a while, peak out at some point, and then begin to trace a moderate decline. Thus, the effect of public investment in pushing up GDP growth is likely to diminish going forward.