Japan: Strong Q1 GDP Growth on Improving Domestic Demand

GDP growth in Q1 08 was slightly stronger than expected at 0.8% q/q (consensus: 0.6% q/q; DB: 0.7% q/q). However, as we suspected, Q4 07 GDP growth was revised down to 0.6% q/q from a previously reported 0.9% q/q mainly on the back of a sharp downward revision in non-residential capital expenditure.

The strong GDP growth in Q1 was driven by continued strong export growth and an improvement in private domestic demand (see chart 1). Net export and private domestic demand contributed 0.5 pp and 0.4 pp, respectively, to GDP growth in Q1 while inventories and public investment overall subtracted 0.1% pp from GDP growth. Private consumption at 0.8% q/q (DB: 0.4% q/q) was significantly stronger than expected, while residential investment at 4.9% q/q (DB: 8.5% q/q) was weaker than expected. However, as housing starts have recovered strongly since late 2007, we believe the recovery in housing construction probably has been pushed into Q2, creating some upside on our Q2 GDP forecast.

Business investment was the weakest part of the economy in today's GDP report. As we suspected, nonresidential fixed investment was revised significantly down in Q4 07. In addition, private non-residential investment in Q1 declined by -0.9% q/q (DB: 0.5% q/q).

The main message in today's report is that, currently, the Japanese economy has been surprisingly resilient in light of very negative business and consumer sentiment in Japan and the uncertainty about the global economic outlook. While growth will most likely remain healthy in Q2 we expect a significant slowdown as the main growth engines of exports and recovering housing construction, are expected to lose considerable steam in H2 08 (see chart 1).

We do not expect today's GDP figures to have a significant impact on BoJ policy. As long as the BoJ does not have a clear view of the likely slowdown in the global and Japanese economy, it will be on hold and maintain a neutral bias in its monetary policy.

Market reaction: 2Y bond yields up by 2bp to 0.84% and JPY strengthened slightly on the GDP report

Danske Bank
http://www.danskebank.com/danskeresearch

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