Japan Posts Solid Q3 Growth

The Japanese economy grew at a 4.8% annual rate in the third quarter. This followed a 2.7% growth rate in the previous quarter, thus marking a clear path change from the previous four quarters of consecutive decline. Real GDP is, however, still 6.7% below the high value set at the beginning of last year.

Growth Analysis

During the global recession, Japan's decline was led by a sharp contraction in exports as firms and consumers in other countries reduced spending. This in turn had negative repercussions on capital investment and on consumption as the jobless rate increased. In a similar fashion, this year's turnaround has been led by exports. By region, exports to North America, China and the rest of Asia bottomed out at the beginning of the year and have since increased by 30% or more. Exports to Europe—both Western and emerging—have been rather flat for several months, but are nevertheless up roughly 10% from their March lows. Exports to the rest of the world, in contrast, have yet to show significant signs of recovery. It is not surprising that Japan's export growth has been directed toward the wealthier countries, and to the Asian economies that in turn export to them. But this also indicates, given the sluggish world economy, that Japanese goods remain highly desirable abroad.

The next-largest growth contributor in the third quarter was private consumption. Though its rise was not as strong as in the second quarter, the fact that household spending grew at all reflects the effectiveness of the fiscal stimulus programme; incentives to spend have outweighed the negative effects of flat wages and high unemployment. The third quarter also saw an increase in capital expenditures (capex), after five consecutive quarters of decline. The rise partly reflects the improvement in exports—manufacturers are less hesitant to buy equipment when their sales are improving—but also simply reflects the fact that capex was at rock-bottom levels after falling more than 20% from its peak.

The other growth sectors were inventory investment and government consumption, both of which posted small gains. The largest decline was residential investment, although in Japan's case the decline was caused by the weakening economy, not vice versa as in the United States. There was also a small decrease in public works spending, which occurred despite the government's commitment to fiscal stimulus, suggesting that the construction companies have little political power as things stand.

Outlook and Implications