Japan’s Economy Grew Much Faster in Q3 Than First Estimated

(Bloomberg) -- Japan’s economy expanded in the third quarter at a much faster pace than initially reported, driven by stronger capital investment and private consumption ahead of October’s sales tax increase.

Gross domestic product grew at an annualized pace of 1.8% in the three months through September from the previous quarter, faster than an initial reading of 0.2%, revised Cabinet Office data showed Monday. The result was stronger than all the projections of economists surveyed by Bloomberg. The median forecast was for a 0.6% expansion.

While the updated figures show domestic demand is continuing to power growth in Japan despite a global slowdown, front-loading of spending before the tax hike could amplify a contraction expected in this quarter as the economy contends with the fallout of the higher tax and typhoon damage.

Key Insights

• Revised third-quarter growth came in faster than the initial government estimate after companies capital spending proved twice as strong as initially thought. Continued robustness in business investment is a positive sign that concern over the global slowdown has yet to buckle corporate sentiment.
• “Capital spending was the key driver for the upward revision,” said Norio Miyagawa, senior economist at Mizuho Securities Co. A shortage of workers is forcing companies to invest in labor-saving equipment, while the Oct. 1 sales tax hike may also have pushed some companies to bring investment forward, he said.
• The figures come after the government last week announced 13.2 trillion yen in fiscal measures to support growth and the recovery from typhoon damage. While domestic demand has kept the economy expanding this year despite falling exports, gross domestic product is expected to contract 2.6% in the last three months of this year as consumers stay home following October’s sales tax hike.
• Looking ahead, the government said its fiscal package will boost growth by 1.4 percentage point over time. Economists have cast doubt on that figure and the speed at which spending will reach the economy, but they largely agree that the package makes it easier for the Bank of Japan to hold off on extra stimulus.
• “Today’s data is a rear-view mirror image of the economy. What’s important for the BOJ is the landscape in front of it,” said Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia, flagging concerns about production and consumption in the current quarter. “All in all, I think the BOJ will still be nervous about the real strength of the economy.”
• While the U.S.-China trade war continues to cast a large shadow over the global economic outlook, Tokyo’s own trade spat with Seoul has cut spending by South Korean tourists in Japan, weighing on overall growth.

What Bloomberg’s Economists Say

“A surprisingly big upward revision to 3Q GDP growth sets the economy up for a deeper pullback in 4Q in response to the higher sales tax. The issue then will be whether the economy can get back on its feet to avoid a recession. A higher reading on our recession probability gauge suggests it could be a close call, but our view is that higher fiscal spending will come to the rescue just in time.”

--Yuki Masujima, economist

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• On a non-annualized basis, the economy expanded 0.4% from the second quarter. Economists predicted a 0.2% expansion.
• Business investment rose 1.8%, compared with a forecast for a 1.4% gain.
• Private consumption increased 0.5%. The forecast was for a 0.4% gain.
• Separate data showed the current account balance for October was a surplus of 1.82 trillion yen, compared with the 1.81 trillion yen surplus estimated by economists.

--With assistance from Tomoko Sato and Toru Fujioka.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Jason Clenfield

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