Japan’s economy grows faster than estimated, but alarm bells ring

Japan‘s economy expanded at a much faster pace between July and September than initially reported, driven by resilient domestic demand even as exports took a hit from slowing global growth and rising trade tensions.

Gross domestic product (GDP) grew an annualised 1.8 percent in the third quarter, significantly stronger than the preliminary reading of 0.2 percent annualised growth, the data showed.

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The stronger growth marked Japan’s fourth consecutive quarter of expansion and also beat economists’ median forecast for a 0.7 percent gain, revised Cabinet Office data showed on Monday. It was mostly driven by improvements in capital expenditure, made by businesses, and private consumption.

However, analysts say the third quarter performance, which was the weakest growth seen this year, masks some fragility that could lead to a much weaker fourth quarter.

“While Japan’s economy expanded more rapidly ahead of October’s sales tax hike than initially estimated, output is set to shrink in 2020,” said Marcel Thieliant, senior Japan economist at Capital Economics.

“The main reason for the upward revision was that non-residential investment jumped by 1.8 percent on-quarter instead of the preliminary estimate of 0.9 percent,” he wrote in a note.

Behind the big headline increase was strong investment from non-manufacturers, such as retailers, said Takeshi Minami, chief economist at Norinchukin Research Institute.

“In contrast to that, spending by manufacturers wasn’t so strong.”

The jump in capital spending of 1.8 percent outpaced the median forecast for a 1.7 percent increase.

Meanwhile, private consumption, which accounts for some 60 percent of GDP, rose 0.5 percent from the previous three months, slightly better than the preliminary reading for a 0.4 percent gain.

The better-than-expected GDP revision comes after exports and factory output posted their largest declines in years in October, exposing widening cracks in an economy hurt by declining demand.

The Bank of Japan could offer a bleaker assessment on factory output than it reported in October at its rate review this month, sources with direct knowledge of the matter told Reuters.

Some analysts are worried that the jump in business and household spending before October’s increase in sales tax bodes ill for demand in the months ahead, threatening to leave the economy without a growth driver unless exports rebound.

A gloomy set of data, including worse-than-expected October household spending and retail sales figures, suggests the sales tax increase may have a more significant impact on consumption than previously thought.

Analysts already expect the economy to shrink in the current quarter due to the sales tax increase.

“The figures on consumption that were released on Friday were weak,” said Minami at Norinchukin Research Institute.

“The economy will likely not be able to avoid contraction in the fourth quarter.”

Japan’s cabinet approved a $122bn fiscal package last week to support stalling growth and as policymakers look to sustain economic activity beyond the 2020 Tokyo Olympics.

Net exports, which are exports minus imports, subtracted 0.2 percentage points from revised GDP growth, while domestic demand added 0.6 percentage points.