Japan: Rising Sun Again?

This is an latest indicative report on the state of the Japanese economy.

Reuters reported today that Japan’s economy grew at the fastest pace in more than two years in the third quarter as stimulus lifted consumer spending and capital spending rose. However,analysts cautioned that growth will slow as falling wages reduce the lure of subsidies on cars and electronics.

Most economists say there is little chance of Japan’s economy, which extended its rebound to a second quarter, returning to recession as stimulus spending overseas should be enough to support a gradual rise in demand for Japanese exports.

The outlook for domestic demand is less encouraging because even though subsidies and tax breaks enacted by the previous government will remain in place until next year, an expected fall in year-end bonuses and a soft labour market mean households will have less to spend. This also means corporate spending will struggle to accelerate.

Japan’s economy grew 1.2 per cent in July-September from the previous quarter, faster than the median estimate for 0.7 per cent growth. It was the largest gain in gross domestic product (GDP) since a 1.4 per cent rise in January-March 2007 and compares with a revised 0.7 per cent expansion in April-June, which was the first growth in five quarters.

“With weakness ahead in private consumption or public spending, a slowdown is unavoidable in the January-March and April-June quarters,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

“The one bright spot is that capital spending turned positive. However, while this signals that capital spending is starting to rise from the bottom, the size is still not enough to promise the kind of speed that would be required to prevent a slowdown in the first half of 2010.”

The new Democratic Party-led government’s measures to support households will eventually help, but they may not make an impact until the second half of next year, economists say.

The Democrats are already mulling an extra budget to support growth, but Japan’s large debt burden means options are limited. Should other signs of weakness in the economy emerge, that could open the Bank of Japan (BOJ) to government pressure to ensure monetary policy and corporate funding measures remain supportive of growth.

National Strategy Minister Naoto Kan said that the economy remained severe despite the pick-up in GDP and that he saw signs Japan was entering deflation. He said the government wanted to work closely with the BOJ to avoid deflation from deepening.

“The economy is expected to continue to recover as overseas economies improve,” Kan told reporters after the GDP data were released.

“At the same time, the employment situation remains very bad and downside risks exist in overseas economies.”

Kan, who has previously said an extra budget may total ¥2.7 trillion yen (RM101 billion), also said today that the better-than-expected GDP data wouldn’t lead to a smaller budget.

December 10-year JGB futures eased to 138.74 after the GDP data, but later reversed course and climbed to 138.93 on concern that the economic growth will lose traction.

The yen held steady at about 89.60 per dollar but slipped about 10 ticks to 134.05 per euro.

The GDP figure translates into an annualised rise of 4.8 per cent, bigger than a 2.9 per cent expansion expected by economists. That follows 2.7 per cent growth in April-June and a 12.2 per cent contraction in January-March.

Private consumption rose 0.7 per cent, better than a forecast for a 0.5 per cent rise but slower than a 1.0 per cent increase in the previous quarter.

Domestic demand contributed 0.8 percentage point to growth, the first positive contribution in six quarters.


In an ominous sign for the manufacturing cycle, inventories of goods started to increase, contributing 0.4 percentage point to growth in July-September, the first positive contribution since October-December 2008.

“Companies have been increasing production for about a year now, and inventories are likely to start piling up toward year-end and around the Chinese New Year,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo.

“This could lead to a slowdown in Japanese production and Japanese growth in April-June 2010.”

The domestic demand deflator fell 2.6 per cent in the third quarter from a year earlier, the largest drop in 51 years.

Capital expenditure rose 1.6 per cent, the first gain in six quarters and faster than a 0.1 per cent increase forecast by economists.

External demand contributed 0.4 percentage point, much slower than the 1.5 percentage point contribution in the previous quarter.

Economists polled by Reuters expect Japan’s GDP to grow 0.3 per cent in October-December and then slow to 0.1 per cent growth in January-March 2010.

It's still early dawn but the sun will rise over Japan,albeit slowly.