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TOKYO (MNI) – Japan’s economy expanded for the fourth straight
quarter in the July-September period, with the pace of growth
accelerating from the second quarter, due largely to strong private
consumption, the Cabinet Office said on Monday.

Gross domestic product grew 0.9% in the July-September period from
the previous quarter, or at an annualized pace of 3.9%, up from a
revised +0.4% q/q and +1.8% annualized in the second quarter (revised
from +0.4% q/q and +1.5% annualized).

Q3 growth was above the median forecast for a 0.6%
quarter-on-quarter rise, or an annualized gain of 2.5%, in a Market News
survey of economists. The forecasts ranged from 0.5% to 1.1% q/q rise,
or at an annualized pace of 1.9% to 4.5%.

The rise in Q3 growth was due entirely to stronger domestic demand,
while net exports were flat on the quarter.

Q3 domestic demand rose 1.0% q/q after a revised 0.1% gain in the
second quarter. Domestic demand added 0.9 percentage point to Q3 GDP, up
from a 0.1 point contribution in the second quarter.

Within domestic demand, growth in private consumption, which makes
up about 60% of GDP, surged 1.1% q/q in Q3, well above the 0.1% gain in
Q2, contributing 0.7 percentage point to Q3 GDP (vs. no contribution in
Q2).

Capital spending rose for the fourth straight quarter but growth
decelerated to 0.8% in Q3 from +1.8% in Q2. Capex contributed 0.1
percentage point to Q3 GDP (vs. +0.2 point in Q2).

Inventory changes added 0.1 percentage point in Q3 after pushing
down overall growth by 0.1 percentage point in the second quarter.

Housing construction rose 1.3% in the third quarter, after falling
0.8% q/q in Q2. Still, this category made no net contribution to Q3 GDP.

Net exports made no contribution to Q3 GDP after adding 0.3
percentage point in Q2.

Exports were up 2.4% on quarter, the sixth consecutive quarterly
gain, slowing from +5.6% in the previous quarter, while imports rose
2.7% q/q, marking the fifth consecutive quarterly increase (also slowing
from +4.0% in Q2).

From a year earlier, Q3 GDP rose 4.4%, the third straight y/y rise,
after rising 2.7% in Q2.

In nominal terms, Q3 GDP expanded by 0.7%, or an annualized 2.9%,
up for the first time in two quarters.

Deflation accelerated in the third quarter, the GDP data showed.

The GDP deflator was down 2.0% from a year earlier after falling
1.8% in the second quarter. And the domestic demand GDP deflator fell
1.2%, compared with a 0.7% fall the quarter before.

Market focus has shifted to how much Japan’s economy will weaken in
the fourth quarter.

Private economists expect October-December GDP to contract
quarter-on-quarter, due to a payback for high durable goods spending in
the previous quarter.

The Bank of Japan said in its semi-annual Outlook Report released
on Oct. 28 that the board revised down its fiscal 2010 real GDP
forecast to +2.1% from its July projection of +2.6% due to weaker
overseas demand, the fading effects of fiscal stimulus, and the recent
appreciation of the yen.

The board’s median GDP forecast for fiscal 2011 is little changed
at +1.8% vs. the +1.9% forecast in July.

But for fiscal 2012, GDP is forecast to rebound slightly to +2.1%,
well above Japan’s potential growth rate estimated by the BOJ to be
around 0.5%.

The potential growth estimate was unchanged from that provided in
April.

The BOJ said on Oct. 28 that “Japan’s economy still shows signs of
a moderate recovery, but the recovery seems to be pausing.”

The BOJ also said that Japan’s economy is likely to grow at a
slower pace for some time, but that it is expected to return to a
moderate recovery path thereafter as the growth rate of the global
economy is likely to start increasing again led by emerging and
commodity-exporting economies.

Economists said the July-September GDP came in stronger than
expected mainly because personal consumption was higher than the average
forecast, thanks to rush buying of cars and tobaccos, and record high
temperatures which buoyed consumption in the summer.

The Q3 consumption rose 1.1% q/q, above the average market forecast
of a 0.9% gain.

Of the domestic final consumption expenditure of households (+1.1%
q/q, +4.6% annualized), durable goods spending surged by 11.1% q/q, or
an annualized 52.5%, the first q/q growth in two quarters after -1.6% in
April-June. Consumer durable goods spending contributed 0.6 point to Q3
GDP, or two-thirds of total growth for the quarter.

The rise was consumer durable spending was led by car purchases, as
consumers rushed to dealerships before the government ended its subsidy
program for buying low-emission vehicles in September. At the same time,
the government’s reward program for purchases of greener consumer
electronics continued to support sales of TVs and air conditioners,
particularly amid record high temperatures triggered by heat waves.

Spending on non-durable goods rose 0.6% q/q in Q3 vs. +0.5% in Q2,
reflecting unusually high demand for cigarettes before the tobacco tax
hike that took place Oct. 1

The outlook for the fiscal 2010 GDP growth of 2.1%, presented by
the Bank of Japan, is expected to be met with ease. The Cabinet Office
said even if GDP contracted 0.9% q/q in both the fourth quarter and
the first quarter of 2011, the GDP for fiscal 2010 would grow 2.1%.

But Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset
Management, said: “It is very difficult to forecast the fiscal 2010 GDP
at present as the Cabinet Office will implement an overall review of the
past GDP figures in December.”

Economists expect October-December GDP to contract in a payback
for the Q3 rush buying. Yoshimasa Maruyama, economist at Itochu Corp,
forecast the Q4 GDP will fall an annualized 2%.

Although economists see a contraction in the Q4 GDP, they do not
expect Japan’s economy to plunge into a recession.

Takumori said the expected plunge in Q4 consumption should not
continue in early 2011, and that the basic capital investment trend
remains solid. Still, the negative impact of the strong yen is a
concern, he added.

Ample funds created by monetary easing among developed economies
will flow into developing and resource-rich nations and support their
growth, which in turn will help raise Japan’s GDP growth, he said.

Maruyama forecast Q1 2011 GDP will increase an annualized 1% due to
the positive impact of the government’s fiscal 2010 supplementary budget
and lingering high growth in Asia.

The stronger-than-expected reading of Japan’s third quarter real
GDP means that the Japanese economy now has to brace for a downturn in
the current quarter, Hirokata Kusaba, senior economist at Mizuho
Research Institute said.

“Given challenging wage and labor market conditions, spending on
durable goods can’t stay strong without tax incentives,” he said.

Kusaba also noted that exports are also poised to drop in the
October-December quarter, thereby raising the likelihood of an overall
growth contraction in the current quarter.

“But exports to Asia are likely to move out of the current downturn
as early as the January-March quarter, helping Japan avoid two
consecutive quarters of a contraction,” he said.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

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