Japan Posts Surprisingly Strong Growth in Q4

Newly released data for the fourth quarter of 2009 shows that Japan's real GDP increased at a 4.6% annualised rate. This means that GDP in the fourth quarter was only 4.5% below the pre-recession peak of two years earlier. The good performance in the fourth quarter followed a lacklustre showing in the third quarter: earlier estimates of 1.3% growth in the third quarter were revised down to zero growth, i.e. no improvement from the second quarter to the third quarter.

Broad-Based Growth

It has long been assumed—correctly—that Japan is dependent on exports to generate growth. And in fact exports were the largest contributor to growth in the fourth quarter. This speaks well of Japanese products: despite sluggish world growth, overseas buyers increased their purchases of Japanese goods. But the second largest gain was in private consumption. This was unexpected: Japanese households are known for their high savings rate, especially now that unemployment is relatively high. Yet consumers continued to increase spending in the fourth quarter, as they did the previous two quarters. This clearly indicates that government incentives to encourage spending have had the desired effect. Less clearly, it may indicate a sea-change in consumers' attitudes—perhaps Japanese consumers are beginning to spend on a level commensurate with their high world incomes, although it is too early to determine if this is truly occurring.

Another welcome change in the fourth quarter was the increase in capital expenditures (capex). After falling for six consecutive quarters, it might seem that capex was due for a turnaround anyway. Yet the economy is still operating below capacity—exports in particular are still 21% below their pre-recession peak—so there was little reason for firms to buy equipment to increase capacity. However, equipment also serves to improve efficiency, which is a huge motivation in Japan under any conditions, but especially now that lowering costs has become crucial. The downside is that efficiency-improvement is a weak incentive for equipment purchases in the presence of excess capacity, so the next few quarters should see only small increases in capex.

The other sectors of the economy followed recent trends. Government consumption increased, while politically-unpopular public works decreased. Residential investment fell, although it is likely due for a rebound after suffering two serious falls over the past three years. Lastly, inventory investment turned positive in the fourth quarter, but it remains a small component of GDP and unlikely to influence the overall growth rate significantly.

Outlook and Implications