Japan's Economy Grew 4.5% in Third Quarter, More Than Previously Estimated

Japan’s economy expanded more than the government initially calculated in the third quarter because of a bigger-than-reported increase in capital spending.

Gross domestic product grew at an annualized 4.5 percent rate in the three months ended Sept. 30, faster than the 3.9 percent reported last month, the Cabinet Office said today in Tokyo. In nominal terms, the economy grew 2.6 percent, less than the 2.9 percent earlier projected, as price declines deepened.

Private consumption, which accounts for about 60 percent of GDP, also fueled the expansion as households stepped up purchases of energy-efficient cars ahead of the expiration of a subsidy program. Japan’s economy is now poised to contract this quarter because of slowing exports and an erosion in the outlook for corporate profits after the yen's surge.

“Today’s report doesn’t change the fact that the economy may contract this quarter, so we can’t be too optimistic,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Exports were doing alright up to the third quarter, but monthly data since then shows signs of demand weakening.”

The median forecast of 19 economists surveyed by Bloomberg News was for a 4.1 percent annualized expansion.

The yen traded at 83.96 per dollar at 9:35 a.m. in Tokyo from 84.09 before the report was published. The Japanese currency has still gained 2 percent since authorities tried to stem the yen’s advance by intervening in currency markets on Sept. 15. The Nikkei 225 Stock Average rose 0.4 percent.

Outpacing U.S., Europe

Japan’s economy has grown for four straight quarters. From the previous quarter, it expanded 1.1 percent, faster than the 0.9 percent rise that was initially reported last month, today’s report showed. The figure compares with a 0.6 percent expansion in the U.S. and a 0.4 percent gain in Europe.

The GDP deflator, a gauge of price trends, fell 2.4 percent in the third quarter from a year earlier, compared with the 2 percent drop initially reported, today’s report showed. It has fallen for four straight quarters.

Capital investment advanced 1.3 percent in the third quarter from the previous three months, more than the 0.8 percent increase in the preliminary report, today’s data showed. Private inventories added 0.2 percentage point to growth, more than the 0.1 percent initially estimated.

Canon Inc., the world’s biggest camera maker, said last week it will spend 30 billion yen ($357 million) by 2015 to build a toner-cartridge plant in Oita prefecture, southern Japan.

Recovering Investment

“Business investment is on a gradual recovery track,” said Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo. Yet, “there’s no change in the picture that a temporary boost in consumer spending was the main cause for the high growth in the third quarter,” he said.

In addition to the added demand as a result of the stimulus measures, consumer spending gained in the third quarter as smokers stocked up before an Oct. 1 tobacco-tax hike and the nation’s hottest summer in more than a century encouraged purchases of air conditioners. Household outlays rose 1.2 percent in the third quarter, compared with the 1.1 percent initially reported, today’s data showed.

Unsustainable Growth

“The economic growth won’t be sustainable in the coming quarters,” Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. “There’s a high chance that the economy will contract this quarter as consumption may retreat and exports slow.”

Japan’s GDP is expected to shrink at a 1.9 percent annualized pace in the three months through December, according to a survey of 42 economists by the Japanese government- affiliated Economic Planning Association released yesterday.

The Japanese parliament last month passed an extra budget to fund Prime Minister Naoto Kan’s stimulus package aimed at fighting deflation and combating the stronger yen. To foster growth, the Bank of Japan cut its benchmark interest rate and created a 5 trillion yen fund to buy assets, including government bonds, corporate debt, real estate investment trusts and exchange-traded funds, in October.

“As long as deflation persists, the BOJ will need to maintain its accommodative monetary policy for some time,” Credit Agricole’s Kato said.

Yen’s Advance

The yen’s 10 percent gain against the dollar this year is threatening earnings of Japanese companies. Net exports, or shipments less imports, were unchanged in the third quarter. On an annualized basis, they subtracted 0.1 percentage point from growth, the first decline in six quarters.

A survey of 353 Japanese companies excluding financial firms showed that companies expect recurring profits to increase 13.3 percent on average in the year starting April 2011, slower than the September estimate of a 19.8 percent gain, according to a Nomura Holdings Inc. report released this month.

Nikon Corp., the Japanese maker of cameras, lenses and chip-making equipment, last month cut its full-year operating profit forecast by 7.7 percent compared with the previous estimate, citing a stronger yen.

In dollar terms, Japan’s $3.96 trillion economy remained larger than China’s $3.95 trillion in the first nine months of 2010, the Cabinet Office said.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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