MNI SOURCES: Japan GDP Calculation Change May Show Firmer Data

By Max Sato

     TOKYO (MNI) - Higher shares of supply-side information on private

consumption and business investment to be applied in the calculation of revised

GDP data for the July-September quarter, due Dec. 8, could show sluggish

consumption was somewhat firmer than previously estimated.

     This could lead to an upward revision to third quarter GDP data, which

originally posted a modest 0.3% rise on quarter, or an annualized 1.4%, as a

rebound in net exports offset a slump in consumer spending caused by bad

weather.

     The government has been studying ways to create a more accurate measure of

the demand side of consumer spending as household spending data rely on a small

sample base and the sample changes regularly.

     To improve its estimate of the gross domestic product, the Cabinet Office

will increase the weighting of supply-side data in the calculation of private

consumption and business investment in equipment, effective with revised (second

preliminary) GDP data for the July-September quarter due on Dec. 8.

     "The annual revision will also be applied to the revised GDP data but the

changes of the weighting (of demand- and supply-side information) will probably

have a bigger impact. We may see firmer consumption than previously estimated,"

a government official told MNI.

     The proportion of demand-side data vs. supply-side data used to calculate

private consumption will change to 31% vs. 69% in the new calculation from the

existing 53% vs. 47%. The proportion of these data for business investment in

equipment will also be altered, to 49% vs. 51% from the current 58% vs. 42%.

     The Cabinet Office has already announced plans for these changes. Within

days, it will follow up with a statement on what points to watch out for in the

new formula.

     "The BOJ believes using supply-side data alone is the best mix but

supply-side data are not always stronger than demand-side data, so it is better

to look at both sets of indicators," the government official said.

     "Among supply-side data, the index of industrial production has been

showing large fluctuations month to month since the collapse of Lehman Brothers

caused a huge negative swing in statistics, showing stronger or weaker figures

than what manufacturing activity really is."

     Still, existing supply-side data reinforces the view of weak consumption in

the third quarter.

     The BOJ's supply-side Consumption Activity Index fell a real 0.3% on a

seasonally adjusted basis in September, the second straight drop after falling

0.9% in August. The index in the July-September period was down 0.6% on quarter

following gains of 0.9% in the second quarter and 0.8% in the first.

     The Cabinet Office's Private Consumption Integrated Estimates index, which

is based on both supply- and demand-side data, paints a similar picture. It

posted the first month-on-month drop in four months in September, down 0.4%

after being flat in August and rising 0.2% in July. The index marked the first

drop in seven quarters in July-September, down 0.5% on quarter, after rising

0.7% in April-June.

     However, the government's consumption index will also reflect the change

made to the balance between demand- and supply-side information in the GDP

calculation.

     According to the preliminary GDP data for the July-September quarter,

private consumption, which accounts for about 60% of GDP, fell 0.5% on quarter,

the first drop in seven quarters after a revised +0.7% in Q2. It trimmed Q3 GDP

by 0.3 percentage point while domestic demand lowered total growth by 0.2

percentage point.

     Business investment rose 0.2% on quarter in Q3 for the fourth straight q/q

increase after rising 0.5% in Q2, but it made zero (+0.0 percentage point)

contribution to the Q3 GDP.

     The Cabinet Office will calculate revisions to the Q3 GDP after looking at

capex and private-sector inventories in the Financial Statements Statistics of

Corporations by Industry, a quarterly survey by the Ministry of Finance due this

Friday.

     In monthly data, weather conditions and goods price swings continue to

cause fluctuations, with a slight rebound expected for November. But retail

sales and consumer spending are expected to remain modest due to population

aging and frugal household spending habits.

     Data released Wednesday showed retail sales fell 0.2% on year in October,

the first year-on-year drop in 12 months, as typhoons hit many parts of the

country for two weekends in a row and there was one fewer Saturday compared to

the year before.

     But the government left its assessment of consumer spending unchanged from

the previous month, saying retail sales showed "signs of a pickup." It has

maintained that assessment since the data for November last year, when it

upgraded it from "flat."

     Compared to the previous month, retail sales were unchanged on a seasonally

adjusted basis after rising 0.8% in September. The three-month moving average of

August-October sales fell 0.3% after rising 0.1% in the July-September period.

     Department store sales component of government retail sales (slightly

different from industry data) slumped 2.0% on year, as the stormy and rainy

weather kept shoppers away while low temperatures supported sales of autumn and

winter clothing. Indications suggest a rebound in November as the weather

stabilized, an official at the Japan Department Stores Association said.

     "There are both positive and negative factors in the October data,"

Kazuhiko Manaka, director of the Office of the Current Survey for the Service

Industry at the Ministry of Economy, Trade and Industry, told MNI.

     "In the seasonal adjusted month-to-month move, the level of the retail

sales index has been flat for a long time, with positive and negative factors

switching positions from time to time," he said.

     In October, fuel sales rose 6.0% on year in light of rising crude oil

prices, posting the 11th straight year-on-year rise, while automobile sales

gained 3.2% on continued solid demand for new models. Sales of medicine and

cosmetics rose 3.2% as the cold season began and demand from visitors from

overseas remained strong.

     On the downside, sales of food and beverages fell 1.5% on year as prices of

fresh food slipped, marking the first drop in eight months.

     "People are also looking for lower prices and they have not moved out of

their frugal spending patterns while wages are growing only gradually," Manaka

said. "Retail sales lack strength."

     Sales of machinery (consumer electronics) dipped 0.9% on year as many

consumers waited for the November release of the iPhone X, instead of buying the

iPhone 8 that went on the market in September.

     Economists expect retail sales to remain not so strong but not so weak

overall, being propped up by rising energy costs, solid demand for automobiles

and spending on luxury goods by wealthy consumers amid wealth affect from the

stock markets.

     "The METI's BigData STATS showed the index showing home electric appliances

POS (point of sales) at large retailers rose 5.2% on year on Nov. 19 after the

recent slump through October. This indicates demand for smartphones may have

rebounded this month," said Akiyoshi Takumori, chief economist at Sumitomo

Mitsui Asset Management.

     The iPhone X was released on Nov. 3. The index rose 0.2% on year on Nov. 12

and gained 1.7% on Nov. 7 after falling 0.5% on Oct. 29. In the whole of

October, the index slumped 2.7% on year after slipping 0.5% in September.

     "But household spending will remain sluggish as the share of seniors

continues to rise. Retail sales figures are nominal, so changes in fresh food

and energy prices tend to make them look bigger or smaller than actual demand."

     Real average household spending, due Friday, is forecast to have slumped

0.4% on year in October, the second consecutive drop, after falling 0.3% in

September, according to the median projection by economists polled by MNI.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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