Japan posts faster than expected Q3 growth

JAPAN'S economy grew slightly faster than expected in Q3 and is expected to gather pace in the last quarter with increased consumer spending ahead of a tax hike next year, but business investment came in well below economists' forecasts.

The 0.5 per cent expansion in the July-Sept quarter was slower than the 0.9 per cent growth in Q2 but topped the median estimate for a 0.4 per cent increase. It marked a fourth straight quarter of growth, the best run that the world's third-largest economy has had in three years.

Finance Minister Taro Aso indicated that the government will not rule out foreign exchange market intervention to prevent shifts in the yen rate from derailing economic recovery.

His remarks in Parliament yesterday pushed the yen down to close to 100 to the US dollar, which many Japanese exporters see as a level that will help maintain export competitiveness and encourage business investment.

Exports weakened in Q3 as large capital outflows from South-east Asia dented growth, though economists expect export levels to improve going into next year as overseas economies stabilise.

The success of Prime Minister Shinzo Abe's "Abenomics" this year has hinged mainly on aggressive monetary easing by the Bank of Japan (BOJ), which has had the effect of weakening the yen. But a senior BOJ official said yesterday that it was not the object of monetary policy to influence the exchange rate.

Mr Aso indicated that the government is ready to assume this role, if needed. Japan no longer faces criticism from other major economies that its "Abenomics" stimulus policies are aimed at intentionally weakening the yen and giving exporters a trading advantage, he said.

He added that as with any other country, Japan needs to ensure that it retains the currency intervention option as a policy tool and be ready to take action when markets are excessively volatile, Reuters reported.

His comments pushed the yen down to a two-month low against the US dollar and at the same time buoyed Tokyo stock prices, with the Nikkei 225 stock average rising 309.25 points or 2.1 per cent to 14,876.41.

Growth is expected to accelerate in Q4 on the back of government stimulus and improved external demand in China and elsewhere.

"Economic growth is expected to accelerate in the final quarter of this year. Despite the soft headline figure today, there's no need to be pessimistic about the outlook," Reuters quoted Junko Nishioka, chief economist at RBS Securities, as saying.

"The government's stimulus package is likely to help boost capital expenditure. The ball is in the government's court so I don't think the Bank of Japan will come under pressure for further monetary easing any time soon."

Japan's minister in charge of economic revitalisation, Akira Amari, also said that the economy continued to look up because of firm domestic demand.

Mr Amari said that exports will recover in the current quarter as the US economy recovers and uncertainty over the Chinese economy subsides.

Domestic consumption is also expected to accelerate further in the final months of this year as consumers buy in advance of a scheduled increase in the national consumption tax from 5 per cent to 8 per cent from April next year. A tighter labour market and signs of rising wages should also bolster consumer spending in coming quarters, economists said.

However, capital expenditure growth slowed to 0.2 per cent in Q3, well below a median estimate of 0.8 per cent, suggesting that companies remain reluctant to deliver the increased investment needed for a sustained recovery.

Domestic capital investment remains the biggest uncertainty but a government stimulus package is expected to boost overall levels of spending, and the government's determination to maintain a steady exchange rate for the yen should also encourage domestic business investment, economists say.

Meanwhile, the results of a Reuters survey published yesterday showed that confidence levels among Japanese firms rose for the first time in three months in November, and is expected to improve further over the coming three months.

Revised official data published yesterday also showed that Japan's industrial output rose 1.3 per cent in September from the previous month. Though slightly less than the initial reading, it confirmed ongoing economic recovery.