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Japan GDP revised down, policy response in doubt

By Stanley White
/ Source: Reuters

By Stanley White

TOKYO (Reuters) - Japan's economy grew at a far slower pace in the third quarter than first thought as capital spending fell, but a double-dip recession is seen as unlikely as exports rebound and corporate spending shows signs of bottoming out.

Revised figures also showed that personal spending improved due to subsidies from Japan's previous government. Still, the figures are likely to pressure the new government and the Bank of Japan (BOJ) to craft new policies for the corporate sector, which is lagging gains in private consumption.

Japan's Democratic Party-led government, in power for about three months, agreed on Tuesday a 7.2 trillion yen ($81 billion) stimulus package that focuses on the household sector by providing support for job seekers and extending subsidies on energy-efficient goods inherited from the previous government.

The Democrats are likely to avoid a return to recession before upper house elections next year. But economists warn that their stimulus measures may not have much impact as there is insufficient new spending and the pace of recovery will be very slow unless further steps are taken.

"I expect the BOJ and the Democratic Party government to do something that will have an immediate effect to keep the Japanese economy afloat," said Yoshikiyo Shimane, chief economist at Dai-Ichi Life Research Institute.

"It has been said the Japanese economy bottomed out this past spring, but the July-September figures confirmed that the recovery is very weak."

Revised figures released on Wednesday showed gross domestic product grew 0.3 percent in July-September compared with analysts' median forecast of 0.7 percent expansion and the government's preliminary estimate of 1.2 percent growth.

The U.S. economy also grew more slowly than first thought in the third quarter, but still expanded at a 2.8 percent annualized rate, while the euro zone grew 0.4 percent in the quarter.

On an annualized basis, Japan's economy expanded 1.3 percent, against the government's initial reading of 4.8 percent growth. The median forecast was for 2.8 percent annualized growth.

Capital spending fell 2.8 percent, though preliminary data had shown a 1.6 percent rise, while economists had estimated a 1.5 percent decline.

Corporate spending has fallen for six consecutive quarters, the longest streak since 1976, but the pace of decline has slowed since the start of this year.

With global consumer demand still weak, some Japanese companies are cautious about increasing investments quickly.

Japanese chipmaker Elpida Memory Inc says its capital spending will be unchanged next fiscal year. In contrast, sector leaders Samsung Electronics and Hynix Semiconductor in South Korea are looking to raise spending.

The BOJ's closely watched tankan survey due on December 14 is likely to show that Japanese firms' confidence improved from three months ago but at a much slower pace due to yen's rise and deflation.

Worries about the pace of economic recovery at home and abroad helped push the Nikkei share average down 1.3 percent on Wednesday, while Japanese government bond futures rose.


Making up for sluggish domestic demand were exports, with external demand boosting the economy by 0.4 percentage point, the same as the preliminary figure.

Private consumption also rose 0.9 percent, slightly faster than the preliminary estimate of a 0.7 percent increase.

"I think exports and capital spending will become firmer from now on, and as long as exports or capital spending do not turn negative quarter-on-quarter, GDP itself will probably be able to avoid turning negative quarter-on-quarter," said Kyohei Morita, chief economist at Barclays Capital.

The government's fiscal policy options are limited due to the country's large debt burden, so it could pressure the BOJ to buy more government debt or launch more lending schemes to lower long-term interest rates.

Japan's new government, largely untested in fiscal policy, faces a difficult task as deflation mounts and a stronger yen threatens exports.

The revised data showed the domestic demand deflator fell 2.8 percent in the third quarter from a year earlier, the largest decline in 51 years.

"Although the third-quarter figures were revised down sharply as expected, I still expect the economy to continue a steady recovery toward next year on the back of a recovery in the global economy," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Securities.

Pressure from the government led the BOJ to offer new short-term loans to banks last week to lower money market rates and slow the yen's rise.

Japan's economy had contracted for four straight quarters as exports of cars, TVs and machines plunged in the wake of the global economic crisis.

The economy has been growing since the second quarter due to global stimulus and subsidies enacted by the previous government.

(Graphic by Claire Morel; Editing by Kim Coghill)