Inventory reporting skewing Japan’s GDP: Nikko AM.
Japan’s GDP has been greatly understated because companies and distributors are not replenishing their inventories, according to John F. Vail, Chief Global Strategist at Nikko Asset Management, a related entity of Tyndall Investment Management Limited (Tyndall AM).
“Importantly, inventories declined less than the previous quarter, so under GDP accounting, this added to GDP growth,” said Mr Vail. “But the fact that they declined at all remains a mystery to us, especially as companies stock up for the pre-VAT-hike demand. Notably, inventories have now decreased much more during this string of declines than after the Lehman shock.”
Officially, Japan’s GDP grew 1.9% quarter-on-quarter seasonally adjusted annual rate (SAAR) versus the 1.8% consensus estimate. But Nikko AM believes that GDP growth would have equalled 3.6% quarter-on-quarter SAAR, if inventories had not decreased. Thus, Nikko AM’s house view is that either revisions (which are commonly large for inventories) will hike this year’s 3rd quarter GDP, or that growth figures, being understated, will be even stronger in the 4th quarter.
In other data, personal consumption was relatively flat quarter-on-quarter, while capex proved much weaker than expected, barely increasing quarter-on-quarter. Government consumption rose mildly, but government capex surged much more than expected, driven by accelerated spending in Tohoku. Net exports subtracted from growth even more than expected, at a 1.8% subtraction.
“Assuming no revision to this year’s 3rd quarter data, our estimates for Japan’s GDP indicate that if inventories increase strongly in the 4th quarter, then GDP growth will be 5.5% quarter-onquarter SAAR, leading to a 2.0% year-on-year growth rate for calendar year 2013,” said Mr Vail.
“So, in sum, we believe Japan’s economic growth has been greatly understated and that surprisingly good GDP data lies ahead. GDP in the 2nd quarter 2014, post-VAT-hike, should decline. But we believe that it will be mild, at around -2% quarter-on-quarter SAAR supported by inventory growth, and will return to mild positive growth in the 3rd quarter 2014.”
