Japan exports plunge -18.7%

Partly to blame was the recent escalation of China-Japan dispute.

DBS Group Research noted:

According to the first round estimate of the 3Q GDP, the economy contracted sharply by -3.5% QoQ saar last quarter. Exports of goods and services plunged -18.7%, due to the deterioration in overseas demand, the weakness in Japan’s export competitiveness, as well as the recent escalation of China-Japan dispute.

Private non-residential investment (which highly correlates with exports) also fell in 3Q, offsetting the positive growth in public investment and private residential investment (driven by reconstruction). Meanwhile, private consumption expenditures dropped -1.8% in 3Q, as a result of the expiration of government subsidies on car purchases.

While the markets correctly forecasted the contraction in 3Q GDP, many haven’t yet revised the full year GDP estimates. A positive growth of 4% in 4Q will be needed for the full year growth to match the current consensus forecast of 2.1% (Bloomberg survey, November). The fact is that the leading indicators including industrial production forecast (Oct), machine orders (Sep) and construction orders (Sep) have continued to decline.

While Japan’s trade data for October are not yet available, China already reported a deeper decline in its imports from Japan in October. Chances are high that GDP growth will contract for another quarter in 4Q, albeit at a more moderate pace than in 3Q. We have further lowered the 2012 GDP growth estimate to 1.6% from 2.0%.

Going forward, our growth forecast for 2013 is kept unchanged at 1.0%, which implies the economy will return to a recovery path in 1H13 after the technical recession in 2H12. Global growth is expected to reaccelerate next year, and the risk appetite in global financial markets may also improve, which should help Japanese exports through the channels of rising demand and a weakening yen.

We also expect exports to China will start to grow again in 1H13, albeit at a slow pace, as the Chinese economy is heading towards a cyclical recovery and the China-Japan tensions could ease in 1H13 after China’s leadership transition is completed.

Meanwhile, the distortion impact on domestic consumption as a result of government subsidy policies will dissipate going forward. As of Sep12, domestic automobile sales have already fallen back to the year-ago levels prior to the implementation of government stimulus. As the payback process has been completed, consumption growth is expected to stabilize/normalize from the beginning of 2013.