Japan real GDP grew 1.0% in Q1, which was less than expected and a downward revision from the 2.2% growth that was originally reported. Year-over-year, Japan real GDP for Q1 2017 was up 1.3%, which is less than the Q4 2016 year-over-year growth of 1.6%.
Japan’s Q1 GDP growth was held back by the change in private inventories, which detracted 0.6 percentage points from GDP growth. Net exports continued to improve as Japan’s quarterly trade deficit was only ¥522 billion, the lowest quarterly deficit since 2011. Private consumption rose 0.3% quarter-over-quarter, which was revised down from the original 0.4% estimate, and it remained at 0.5% year-over-year growth.
The drag from the change in private inventories may reverse in the coming quarters as the segment has been a detractor from growth for three consecutive quarters and four of the last five. Change in private inventories is a volatile component of GDP however, and we would not count on continued inventory building to be a sustainable source of growth ahead.
Japan’s real GDP has grown for five straight quarters, the longest streak since 2006, but growth has primarily been driven by net trade growth rather than private consumption. The key for stronger long-term GDP growth will be promoting more private consumption as private consumption makes up more than 60% of Japan’s GDP growth. In order for consumption to rise, Japan needs to see a rise in wages and household income, neither of which show signs of improving in the near-term.