Japan Economy Expands at 6% Pace as Exports Drive Post-Earthquake Recovery

Japan’s economy expanded for the first time in four quarters as exports recovered from a record earthquake, an expansion that is already slowing because of weakening overseas demand.

Gross domestic product grew at an annualized 6 percent in the three months ending Sept. 30, the fastest pace in 1 1/2- years, the Cabinet Office said today in Tokyo. At 543 trillion yen ($7 trillion), economic output was back to levels seen before the March 11 earthquake, the report showed.

Japan’s return to growth after three quarters of contraction was driven by companies including Toyota Motor Corp. making up for lost output from the disaster. A sustained rebound will depend on how much reconstruction demand can offset a slowdown in global growth as Europe’s debt crisis damps global confidence and an appreciating yen erodes profits.

“GDP will slow very sharply in the current quarter,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. A yen trading near World War-II highs and Europe’s fiscal woes are “very strong headwinds” for the nation’s manufacturers, he said.

Expansions in Asian nations from China to South Korea to the Philippines are already showing signs of cooling. International Monetary Fund Managing Director Christine Lagarde said on Nov. 12 that Japan needed to swiftly implement reconstruction spending.

Europe’s Woes

The GDP figure was inline with the 5.9 percent median forecast of 26 economists surveyed by Bloomberg News. The yen traded at 77.10 per dollar as of 4:57 p.m. in Tokyo, from 77.18 before the report. The Nikkei 225 Stock Average rose 1.1 percent amid optimism new governments in Greece and Italy will help contain European fiscal woes.

Personal consumption rose 1 percent from the previous three months in the third quarter, led by an increase in durable goods purchases and exceeding forecasts, and overseas shipments advanced 6.2 percent, today’s report showed.

“Market interest has already shifted to a slowing down in the fourth quarter, and the first quarter of next year,” Junko Nishioka, chief economist at RBS Securities in Tokyo said in a Bloomberg Television interview. Nishioka predicted the pace of growth will dip below 2 percent in the first half of 2012.

Japan’s rebound is likely to slow to 2.1 percent this quarter, according to the average forecast of 42 analysts surveyed by the Economic Planning Association, a government- affiliated body, released last week.

Reconstruction Work

“Japan’s economic growth will remain elevated, mainly on domestic demand,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. (JPM) in Tokyo and a former Bank of Japan official. “Especially from the first quarter, we expect reconstruction work in the Tohoku region to support the economy,” he said, referring to the northeast region struck by the temblor.

Companies plan to cut machinery orders for the first time this year in the quarter ending Dec. 31, a government survey last week showed, a sign growth will slow even as government spending for reconstruction takes effect. Industrial production fell in September for the first time since the March disaster.

“We’re aware that the environment surrounding the Japanese economy is becoming more harsh,” Motohisa Furukawa, the economy minister, told reporters in Tokyo today. “A further slowdown of overseas economies as well as fluctuations of the yen and stock prices may pose downside risks to Japan’s economy, and we must pay close attention to these factors.”

Currency Losses

Publicly traded companies have lost 301 billion yen ($3.9 billion) in currency transactions because of the stronger yen, a report by Tokyo Shoko Research Ltd., a credit research company, showed last week. Nintendo Co., the world’s largest maker of video game consoles, forecast its first annual loss in at least 30 years.

Toyota’s second-quarter profit fell a bigger-than-expected 19 percent to 80.4 billion yen in the quarter ended Sept. 30. Even so, Asia’s biggest automaker has been hiring temporary workers to help make up for lost output after the March earthquake and tsunami that left about 19,000 dead or missing caused shortages of parts and electricity.

Japan’s currency last week advanced to its highest level since authorities intervened on Oct. 31, the day the yen reached a postwar record of 75.35 against the dollar. Prime Minister Yoshihiko Noda said in parliament on Nov. 11 that the government would sell yen as necessary.

‘Competitive Devaluation’

“The Ministry of Finance has been intervening more than they ever have,” Martin Schulz, a senior research fellow at Fujitsu Research Institute in Tokyo who has previously conducted research for the Bank of Japan (8301), said before the report. “This policy helps exporters and it produces liquidity, but it produces major disruptions in Asia in terms of competitive devaluation.”

The yen may remain at 77 per dollar until the end of March 2012, according the median analyst estimate compiled by Bloomberg. Former Japanese Finance Ministry official Eisuke Sakakibara said last month it may strengthen to the low 70s against its U.S. counterpart.

Japan’s central bank will hold a two-day policy meeting from tomorrow, after having expanded its asset-purchase program last month by 5 trillion yen to shield the economy from damage from the strong yen. In a Bloomberg News survey, 13 of 14 economists expected the BOJ to leave policy unchanged.

Japanese companies with factories in Thailand have also had to contend with record flooding in the Southeast Asian country. Unable to measure the extent of the damage, Toyota and Honda Motor Co. have scrapped their annual profit forecasts.

The lower house of parliament approved on Nov. 10 a third supplementary budget for the reconstruction of the quake- devastated northeast region of the nation. The 12.1 trillion yen budget comes on top of two packages worth a total of 6 trillion yen already pledged.

To contact the reporter on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Ken McCallum at kmccallum4@bloomberg.net

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