Inventories Act as Wild Card in Japan's Economic Growth Picture

  • Upward revision in 3rd-quarter GDP influenced by inventories
  • Private inventories subtracted less from growth than forecast

A surprise driver of the upward revision in Japan’s gross domestic product from contraction to growth in the third quarter was private inventories.

While Tuesday’s GDP revision mainly stemmed from changes to both private inventories and capital spending, the inventories contribution was much stronger than economists had forecast. That led to a bigger shift in the GDP figure than projected -- and what was initially thought to be a second consecutive quarter of contraction is now being called one of growth, avoiding a recession.

Here’s the role that private inventories played:

  • Inventories subtracted 0.2 percentage points from third-quarter growth, better than the 0.5 percentage-point subtraction economists surveyed by Bloomberg had forecast.
  • Two of the four components of inventories were revised upward. The contribution of raw materials was updated to 0 percent from the government’s initial reading of a 0.1 percent decline .
  • The impact of distribution of inventories was revised to a 0.1 percent drop from the government’s initial reading of a 0.3 percent decline.

Inventories data tend to be more subject to revision than other pieces of GDP, partly because initial figures for goods-in-process and raw material inventory data are an estimate that relies on past trends. Also, the government’s calculation method for private inventories isn’t fully open to economists, making it difficult for them to forecast.

That’s expected to remain the case for this year’s fourth quarter.

“We continue to expect the economy will grow at annualized 1.5 percent in the fourth quarter” as production may increase, supported by solid exports and domestic demand, said Masamichi Adachi, an economist at JPMorgan Chase & Co. and a former central bank official. “Yet inventories are a wild card.”

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