In Q4 GDP contracted sharply by 3.3% q/q (Consensus: 3.1%, Danske Bank 2.5%) as Japanese exports plunged on the back of slower global growth. This was the third consecutive quarter of negative growth and the biggest quarterly drop in GDO since the first oil crisis hit Japan in 1974. GDP growth in Q3 was revised down slightly to minus 0.6% q/q from the earlier reported minus 0.5% q/q.

The contraction in GDP was mainly driven by a 13.9% q/q plunge in exports (see table 1 for details). Overall net exports in Q4 saw a 3pp q/q decline from GDP growth, slightly more than we expected, as import growth was surprisingly resilient increasing 2.9% q/q. The resilient import growth is partly explained by continued inventory build up in Q4 last year with inventories overall adding 0.4pp q/q to GDP growth. The sharp decline in exports and industrial activity apparently hit corporate investment hard in Q4. Non-residential fixed investments plunged 5.3% q/q (more than double our forecast of just a 2.5% q/q decline).

In view of the sharp drop in GDP and the deteriorating labour market, Japanese households did show some resilience. Private consumption in Q4 declined 0.4% q/q, slightly less than expected. In addition residential investment soared by 5.7% q/q following a similar strong 4% q/q increase in the previous quarter. This underlines that Japan's main problem is a big external demand shock and not a domestic credit crunch as in the US and Europe. Japan is currently being hit particularly hard due to the size of its manufacturing sector and its dependence on the very cyclical car and electronic industry.

Outlook: The near-term outlook remains very weak. Cutbacks in inventories and continued weakness in exports are expected to be a major drag in exports, particularly in this quarter and to a lesser extent in Q2. In our current forecast we expect GDP to contract by another 1.4% q/q and then hopefully we will see some stabilisation in Q2. We have shaved another 0.8pp off our GDP forecast for 2009 and now expect dismal negative 3.8% GDP growth for 2009. The downward revision mainly reflects weaker corporate investments, bigger inventory cuts and slightly weaker private consumption (see table 1 for our revised forecast).

Implications: Pressure on the Bank of Japan (BoJ) for unorthodox easing measures is likely to increase, but in our opinion the BoJ is unlikely to cut its leading O/N target rate (currently at 0.1%) any further. The BoJ is scheduled to meet later this week and will probably announce an extension to its current programme to buy commercial paper and could announce plans to start purchasing corporate paper. However, as we stressed above, Japan's main problem is not lack of access to credit, but weaker demand globally and hence easier access to credit will probably not save the day in the short run. At this stage fiscal easing is probably more important. However, Japan's fiscal response has been weak compared with the US and Europe and at the moment the supplementary budget has stalled. Weaker growth will only weaken the yen if it induces the BoJ to a sharply increased the monetary base. Despite recent unorthodox easing measures the BoJ's moves have as yet been modest compared with those of the US.


Danske Bank


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