Japan - Japan back to growth as GDP rises 1.5%

Japan’s economy expanded strongly between July and September, returning to growth after three consecutive quarters of decline, according to a government preliminary estimate released on Monday.

The 1.5 per cent quarter-on-quarter growth in gross domestic product – equivalent to an annualised rate of 6 per cent – reflects in part the restoration of supply chains disrupted by the huge earthquake and tsunami that hit north-east Japan on March 11.

The expansion was slightly faster than economists polled by news agencies had forecast. However, analysts say the world’s third-largest economy remains vulnerable to the effects of European market turmoil and a continued US slowdown.

Kiichi Murashima, economist at Citigroup Global Markets Japan, said most of the quarter’s growth came in early summer.

“Monthly data have already been showing that the economy is losing steam, particularly in exports and industrial output,” said Mr Murashima, suggesting GDP growth was likely to slow sharply in the current quarter.

Industrial production fell 4 per cent in September, its first monthly decline since March.

The March 11 disaster helped derail Japan’s recovery from a brutal 2008-2009 recession and has left the economy in an extended slump. Monday’s data showed that real seasonally adjusted GDP fell 0.7 per cent quarter-on-quarter in the last three months of 2010 and by the same amount in the first quarter of this year, although the contraction slowed to 0.3 per cent between April and June.

Preliminary estimates of Japanese GDP growth are often dramatically revised as more accurate data becomes available.

The main drivers of expansion between July and September were private demand, which accounted for 1.1 percentage points of growth, and net exports, which accounted for 0.4 percentage points.

Government consumption growth was modest and public investment actually declined 2.8 per cent quarter-on-quarter. However, state spending on reconstruction of tsunami-devastated communities along hundreds of kilometres of the north-east coast is expected to accelerate in coming months.

The Diet’s lower house last week passed a Y12,000bn ($155bn) supplementary budget to support disaster reconstruction, with funds likely to start flowing in earnest early next year. The budget also includes measures aimed at softening the impact on exporters of the strong yen, which has hit record highs on a nominal basis in recent weeks.

Japan intervened in currency markets to weaken the yen late last month, but many analysts say the impact of the move is likely to be limited.

The yen’s rise is adding to worries about the strength of external demand – long a vital driver of Japanese growth – with many exporters concerned about the prospects for the US economy and the continuing sovereign debt crisis in the eurozone.

Mure Dickie in Tokyo

The Financial Times

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