Japan's Economy Is Still Outrunning Its Potential Growth RateBy
It’s shaken off effects of poor weather and corporate scandals
Capital investment that’s exceeded estimates is a key factor
Japan’s economy is on track to close out the year expanding faster than the rate which typically sparks inflation, even after recent soft readings for consumption and prices.
Global demand remains strong, driving double-digit gains in Japanese exports in recent months and helping to fuel business investment. Capital expenditure stood out in a slew of important data released on Friday, beating expectations with a 4.2 percent gain in the third quarter.
“Overall, the pace of growth remains good," said Masamichi Adachi, senior economist at JPMorgan Securities Japan Co. "An increase in capital investment is playing a big part in this.”
While the fourth quarter got off to an inauspicious start for corporate Japan -- bad weather kept shoppers at home and scandals at companies including Kobe Steel Ltd. and Nissan Motor Co. dominated the headlines in October -- key indicators released this week suggest the impact was limited.
Industrial production rose 0.5 percent from September, lower than estimates, but forecasts point to solid gains for November and December. Consumer spending and retail sales were largely flat.
“Judging from the production data, you didn’t see an impact from the Nissan or Kobe Steel cases,” Adachi said.
The world’s third-largest economy is set to grow by more than 1 percent in the fourth quarter, extending a run of expansion that stretches back to the start of 2016, said Nobuyasu Atago, chief economist at Okasan Securities Co. and a former Bank of Japan official.
“The important thing is that production is at a very strong stage from a cyclical standpoint and you have to make your judgment with that in mind, or you can be wrong,” Atago said. "Consumption will rebound once the effects of bad weather fade and pent-up demand follows.”
A second reading of third-quarter gross domestic product, due on Dec. 8, may see the 1.4 percent preliminary result revised higher due to the better-than-expected capex data. The central bank’s estimated range for the economy’s potential growth rate at which inflation is supposed to pick up is 0.5 to 1 percent.
Still, as in many other nations, growth has yet to drive strong consumer demand and inflation.
Inflation is rising, with prices excluding fresh food increasing in October by the most in more than two years, but at 0.8 percent it remains far off the Bank of Japan’s 2 percent target. Tepid consumption makes companies cautious about raising prices, while sluggish wage gains keep consumers reluctant to spend.
Adachi’s upbeat outlook comes with a caveat.
“What worries me is consumption,” he said. “When you look at improvement in the labor market, consumption can’t fall. I don’t think only bad weather can explain its weakness. I think people are worried about their futures in general.”
— With assistance by James Mayger