Japanese Third Quarter GDP

Well Japanese GDP maintained its momentum in the third quarter according to the initial data released today:

Japan grew more strongly than expected in the third quarter with strong exports more than offsetting weak domestic consumption to produce annualized growth of 2 per cent......The economy, which grew a revised 1.5 per cent in the second-quarter on an annualized basis, has been expanding for seven straight quarters. Next week, the recovery will enter the record books as the longest - though far from the fastest - period of sustained growth since the war."

"Third-quarter numbers showed that consumption shrank 0.7 per cent from the previous quarter. But exports climbed 2.7 per cent and capital investment, in spite of weak recent numbers, jumped 2.9 per cent, marking the 10th quarterly rise in a row."

and Bloomberg:

Consumer spending, which accounts for more than half of the economy, fell 0.7 percent, twice as much as the 0.3 percent drop expected, amid a spell of bad weather that kept shoppers at home and as wages growth stalled.

So the picture remains pretty much the same, strong export lead growth sustained by capital investment, with shrinking domestic consumer demand. A big part of the burden was carried by growing investment demand:

"Capital spending in the quarter surged 2.9 percent, more than three times the 0.9 percent gain expected. Mizuho Financial Group Inc., Japan's second-largest bank by market value, and Tokyo Electric Power Co., the nation's biggest power company, announced plans this month to invest as the economy grows."

But the big question mark still remains as to whether this is anticipating internal demand which may not arrive, and whether or not this investment is justified if export demand weakens. In other words we may have excess capacity building up again, which obviously would be deflationary in its impact. This is presumably not being lost on the BoJ who are using the growth in such investment spending as an argument for raising rates, but here, as I have been arguing, they are trapped between a rock and a hard place, and indeed it is hard to assess how many of these investment projects are being financed now precisely to avoid having to pay the higher interest rates which the BoJ is threatening to introduce later.

One thing which is striking here is the way in which, despite the inevitable labour market tightening as the population shrinks, wage drift and inflation remain incredibly tame. This is an indicator of just how far the reform process has actually gone in Japan, since there seems to be absolutely no room whatever for wage-push inflation. This is also something of a warning for those who simply argue that more structural reforms will cure the problem, since in the case of Japan at least they seem to have been tried and found partially wanting. Still, there are those who live in hope:

Koji Omi, finance minister, told the Financial Times last week that the recovery remained solid in spite of signs of slowing US demand. It was true, he said, that higher profits had not fed quickly into better wages and stronger consumer demand. However, he said that, with the labour market tighter than at any time in 15 years, he expected wages and consumption to pick up soon.