Japan's solid economic growth led by resilient consumer spending in the January-March quarter was revised up sharply by an unexpected surge in private-sector inventories, which topped resilient consumer spending as the largest factor to lead the growth, Cabinet Office data released Thursday showed.

A rebound in business investment was revised up as largely expected while public works spending was less robust than initially estimated, but their positive contributions to overall output were unrevised.

The real gross domestic product grew 0.7 percent on quarter in the first quarter of 2023, revised up from the initial estimate of a 0.4 percent rise, with its annualized growth rate revised up to 2.7 percent from 1.6 percent. The revised growth was well above the median economist forecast of a 0.5 percent rise or an annualized 1.9 percent gain. The forecasts ranged from increases of 0.4 percent to 0.6 percent, or an annualized pace of 1.5 percent to 2.3 percent.

The economy now posted a second straight quarterly growth as the fourth quarter's slight contraction (-0.01 percent) on quarter, or an annualized 0.1 percent, has been revised up to a slight 0.1 percent rise, or an annualized 0.4 percent gain, following a downwardly revised 0.4 percent drop (an annualized 1.5 percent fall) in the third quarter.

The annualized 2.7 percent growth in the first quarter is the second highest among the Group of Seven major economies after Canada's robust 3.1 percent and well above the modest 1.3 percent increase in the U.S.

From a year earlier, the Japanese economy rose 1.9 percent (revised from a 1.3 percent rise) in January-March, posting the eighth consecutive rise following a 0.4 percent gain in October-December.

The Econoday Consensus Divergence Index stood at minus 21, below zero, which indicates the Japanese economy is performing worse than expected in light of weak industrial production and retail sales data for April. Excluding the impact of inflation, the index was at minus 25.

Japanese policymakers believe the domestic economy still needs fiscal and monetary policy support as its output gap has been in negative territory for over three years, although it has narrowed to minus 0.9 percentage point in the first quarter of 2023 from minus 1.2 points in the previous quarter and a wide gap of negative 9.1 points in the second quarter of 2020.

Looking ahead, economic growth in April-June is expected to remain solid as consumer spending is propped up by eased Covid rules and pent-up demand for traveling and dining out, easing the impact of sluggish exports amid slower global demand.

But households continue to face rising costs for food and other daily necessities as suppliers are trying to fully reflect last year's spike in energy and commodities prices. The key is whether small businesses, which employ 70 percent of the workforce, can afford to raise wages at the same fast pace as major firms plan to do in fiscal 2023 that began in April.

The Cabinet Office estimates that the real GDP would have to grow at about 0.4 percent on quarter, or an annualized 1.6 percent, in each of the remaining quarters through January-March 2024 for the economy to hit the official forecast of 1.5 percent growth for fiscal 2023.

The economy grew a real 1.4 percent (revised up from 1.2 percent) in fiscal 2022, below the official forecast of a 1.7 percent rise. It followed a 2.6 percent gain in fiscal 2021, which matched the official projection, decreases of 4.1 percent in fiscal 2020 and 0.8 percent in fiscal 2019, and a 0.2 percent rise in fiscal 2018.

Solid Consumption Revised Down Slightly

Domestic demand was led by consumer spending amid improving sentiment and faster deliveries of automobiles, easing the effects of a drop in external demand, down amid weak exports to Asia.

Private consumption, which accounts for about 55 percent of GDP, rose 0.5 percent (revised down slightly from an initial 0.6 percent) on quarter in the first quarter after rising 0.2 percent in the fourth quarter of 2022, edging up 0.1 percent (revised up from being unchanged) in the third quarter and surging 1.7 percent in the second quarter. Consumption pushed up the GDP by an unrevised 0.3 percentage point after making a positive 0.1 percentage contribution to the total domestic output in the previous quarter.

In the absence of strict public health rules for the first time in three years, many households continued spending more on eating out and traveling, taking advantage of the government's discount program aimed at shoring up the Covid-hit tourism industry.

Capex Rebound Revised Up After MoF Survey

Business investment in equipment rebounded in January-March, up 1.4 percent (revised up from a 0.9 percent rise) on quarter, after falling 0.6 percent (revised from a 0.7 percent fall) in October-December and rising 1.5 percent in July-September. Capex raised the GDP by 0.2 percentage point, unrevised from the initial reading, in the first quarter after providing a negative 0.1- point contribution the previous quarter.

Based on the results of a quarterly business survey conducted by the Ministry of Finance released last week, the median economist forecast was an upward revision to a 1.3 percent increase (forecasts ranged from 0.9 percent to 1.7 percent gains).

The demand-side survey by the MoF showed that combined capital investment by non-financial Japanese companies rose 11.0 percent on year in the January-March quarter, up from increases of 7.7 percent October-December. On quarter, combined capital outlays gained a seasonally adjusted 2.3 percent after rising 0.8 percent in the previous quarter. The capex figures in the preliminary GDP calculation are based solely on supply side data.

Capital investment is generally supported by demand for automation amid labor shortages in some sectors as well as government-led digital transformation and emission control.

External Demand Weak on Slowing Global Demand

External demand was weak in January-March. Net exports of goods and services -- exports minus imports -- made a negative, unrevised 0.3 percentage point contribution to the total domestic output in the first quarter after pushing up the GDP by 0.4 point in the previous quarter.

Japanese exports to posted their first drop in six quarters in the January-March GDP data while imports marked their second consecutive fall after a surge in July-September led by service payments.

The number of visitors from other countries has continued to pick up since the government eased its Covid border control rules in October, leading to higher spending by foreign visitors, which is counted among exports, but shipments of goods to other economies have been sluggish due to a global slowdown.

Private Inventories Revised Up Sharply, Public Works Spending Revised Down

Private sector inventories provided a positive 0.4-point contribution to the first quarter GDP, revised up sharply from the preliminary reading of plus 0.1 point, after pushing down the fourth quarter GDP by a revised 0.4 percentage point. It was the first positive contribution in three quarters.

Companies tend to reduce inventories of in-progress products in January-March but the degree of reduction was less than usual, which led to a large increase in overall private inventories when figures are adjusted for seasonal factors, a Cabinet Office official said. It is not clear from the GDP data as to whether firms were building up inventories to meet higher demand for finished goods, he said.

Public works spending posted its fourth straight increase, up 1.5 percent (revised down from a 2.4 percent rise) on the quarter in January-March, following no growth (revised down from a 0.2 percent rise) in October-December. The median forecast was a smaller downward revision to a 2.1 percent rise. Public investment raised the first quarter total domestic output by an unrevised 0.1 percentage point after making zero contribution to the GDP in the previous three quarters.

Japan's solid economic growth in the January-March quarter is forecast to be revised up slightly to 0.5 percent on quarter, or an annualized 1.9 percent, from the initial reading of 0.4 percent and 1.6 percent. Business investment in equipment is likely to be revised up to a 1.3 percent rise on quarter from an initial 0.9 percent in light of strong quarterly business survey results released by the Ministry of Finance Thursday. The increase in public works spending is expected to be revised down to 2.1 percent from 2.4 percent but its positive contribution is seen little changed.

Preliminary data released last month showed that the first quarter GDP growth, which came in stronger than expected after a slight contraction in the fourth quarter, was led by an unexpected rebound in business investment and resilient consumer spending, which mitigated the drag from weak exports amid slowing global growth.

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

Gross domestic product is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Investors in the stock market like to see healthy economic growth because robust business activity translates to higher corporate profits. Bond investors are more highly sensitive to inflation and robust economic activity could potentially pave the road to inflation. By tracking economic data such as GDP, investors will know what the economic backdrop is for these markets and their portfolios.

The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.