Japan economy losing pace despite solid third quarter growth

TOKYO (AP) – Japan’s growth accelerated in the July-September quarter thanks to robust consumer spending, offering a rare piece of positive economic news that is likely to prove fleeting.

All signs indicate that the uptick is temporary, and momentum will almost certainly fade as slowing exports and a persistently strong yen take their toll on the world’s No. 3 economy. Japan will be lucky if it can eke out growth in the fourth quarter.

First, the good news.

Real gross domestic product – a measure of the value of all goods and services produced – expanded at an annualized rate of 3.9 percent over the three-month period, marking the fourth consecutive quarter of growth, the Cabinet Office said Monday.

The result outpaced Kyodo news agency’s average market forecast for an annualized 2.6 percent increase and beats a revised 1.8 percent expansion in the April-June period. On a quarterly basis, the annualized figure translates to 0.9 percent growth from the previous three months.

Japan benefited from higher spending by businesses and consumers, who rushed to buy eco-friendly vehicles before government incentives expired. Unusually high temperatures drove sales of summer drinks and clothes, while tobacco demand jumped as smokers stocked up on cigarettes ahead of an Oct. 1 tax hike.

Private consumption, which accounts for about 60 percent of GDP, rose 1.1 percent from the previous quarter, the figures showed. Capital investments by companies climbed 0.8 percent.

Economists warn, however, that because one-time factors fueled last quarter’s numbers, the vigor is unlikely to last. Slowing global demand is undermining exports and factory production, while a strong yen continues to batter companies’ bottom lines.

Exporters like automakers, who have driven Japan’s recovery, are particularly vulnerable to currency fluctuations. When the yen climbs, they lose. A strong yen shrinks the value of their overseas earnings when brought back to Japan and makes their products more expensive in foreign markets.

After the GDP report, Japan’s economy minister wasn’t in a mood to celebrate last quarter’s strong numbers. Instead, he warned of a darker outlook.

“Our economy is stalling as output is weakening,” said Banri Kaieda in a written statement, according to Kyodo.

Goldman Sachs has said it expects growth to “contract significantly” in the fourth quarter. Barclays Capital expect the economy to contract in October-December for the first time in five quarters.

Worried about looming threats, Prime Minister Naoto Kan’s Cabinet approved last month $63 billion in new stimulus spending. The package, which includes financial support for small businesses and local economies, will help lift GDP by 0.6 percentage points, the government estimates.

The government has pressed Japan’s central bank to do more to fight deflation and spark life into the economy. It cut interest rates to virtually zero last month and introduced a 5 trillion yen ($61 billion) program to buy Japanese government bonds and other assets in an effort to spur lending.

Kyohei Morita, chief economist at Barclays Capital Japan, isn’t impressed with the government’s track record so far and says he does not “expect much” from its latest stimulus package.

Moreover, monetary policies by the central bank generally take one to two years to actually lift growth.

“On balance, we believe government action is the best solution but see continued pressure on the BOJ as the most likely approach,” Morita said in a note to clients.