Japan’s Economy Expands More Than Expected on Strong Investment

Updated on
  • Upward revision to business spending exceeds expectations
  • Drop in private consumption underscores soft consumer demand

Japan's Economy Expands More Than Expected

Japan’s economy expanded a faster-than-expected 2.5 percent in the third quarter, as a nearly year-long recovery in exports helped fuel business investment.

The Japanese economy has grown for seven straight quarters, which now registers as its longest expansion since the mid-1990s, following government revisions to previous data released on Friday. A slew of key October indicators suggest that while growth may slow a bit, the GDP expansion will continue in the fourth quarter.

The upward revision to third-quarter growth from a preliminary reading of 1.5 percent was driven by stronger readings of business investment and inventories. 

While export growth is driving corporate profits and business investment, wage gains and consumer spending remain lackluster. Spending by households on durable goods and services fell during the third quarter from the April-June period. Overall pay rose a slower-than-expected 0.6 percent in October from a year earlier, separate data released on Friday showed.

Highlights of the GDP report
  • Gross domestic product expanded an annualized 2.5 percent (estimate +1.5 percent) in the third quarter. That compares with a preliminary reading of 1.4 percent.
  • Business spending rose 1.1 percent (estimate +0.4 percent) from the previous quarter. Preliminary reading was +0.2 percent.
  • Private consumption declined 0.5 percent, unchanged from the preliminary reading.
  • Net exports, or shipments less imports, contributed 0.5 percentage point to growth. This was unchanged from the preliminary reading.

“The solid investment shows Japan’s economy is making a step forward to a self-sustained recovery," Hidenobu Tokuda, a senior economist at Mizuho Research Institute. "Record corporate profits and demand for IT-related goods and labor-saving investment are helping boost business fixed investment." 

Consumer spending isn’t so strong due to tepid wage growth overall, Tokuda said, adding that there’s a risk that the recent rise in oil prices may reduce households’ purchasing power.

Bloomberg Economics 

The key message from Friday’s data is that Japan’s economy is humming along at a rate well above its potential, which is positive for the Bank of Japan’s reflation efforts, Yuki Masujima of Bloomberg Economics wrote.

But a slightly weaker signal from the GDP deflator from the previous quarter indicates it’s going to be hard for the central bank to push inflation much higher. The rapid increase in inventories during the third quarter could unwind in the fourth, weighing on growth.

Other Details

  • Measured quarter on quarter, GDP expanded 0.6 percent (preliminary reading was +0.3 percent).
  • A separate data release showed Japan’s current-account surplus was 2.18 trillion yen in October.

— With assistance by Toru Fujioka, and Yuko Takeo

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