Asia-Pacific

Japan economy grows as capex revives; outlook weak

(Agencies)
Updated: 2010-02-15 13:07

Japan's economy grew faster than expected in the fourth quarter, spurred by a rebound in domestic demand and corporate investment, but the fading impact of government spending likely points to a slowdown in 2010.

But the government is unlikely to take much comfort in the 1.1 percent quarterly GDP rise because few economists expect growth to increase rapidly as an ageing population, falling wages and a large gap between supply and demand push down prices.

That leaves Japan's policy-makers facing a question they so far haven't answered convincingly, which is how to achieve high growth when the huge national debt limits its ability to pump-prime the economy and when the central bank has exhausted its conventional monetary policy options.

In a sign of deepening deflation, the GDP deflator, a broad gauge of price trends, fell a record 3.0 percent in October-December from a year earlier, data released by the Cabinet Office showed on Monday.

The Democratic Party-led government's policies shifting money away from public works projects and into spending for households, which has a less direct boosting effect on the economy, is also expected to slow growth in the short run.

"Capital spending has turned positive, household consumption is strong and exports continued to rise. Japan's economy is doing fairly well in its early stage of recovery," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"But it's hard to determine the outlook. Public works spending has fallen for two straight quarters and the outlook for private consumption is uncertain until the effect of government payouts to households with children begins to show."

Economists say there is little chance Japan will fall back into recession as an expected acceleration in exports and government payouts to households with children in the second half of this year should underpin growth.

The fourth quarter growth was the fastest since a 1.3 percent expansion in April-June 2009. Revised data showed Japan's economy ground to a halt in July-September.

The increase last quarter was bigger than a median market forecast for a 0.9 percent rise, and translated into an annualised rise of 4.6 percent, beating a 3.7 percent forecast.

The US economy grew at an annualised clip of 5.7 percent in the same quarter, while the euro zone economy expanded 0.1 percent on the quarter.

While the positive GDP figures may ease government pressure on the Bank of Japan for further monetary easing in the near term, the central bank will likely stick to its easing bias as it remains on guard against downside risks to growth.

"The BOJ, even though it may not say so, will continue to prefer policies that could prompt a weak yen," said Takuji Okubo, chief economist at Societe Generale Securities, Tokyo.

"As the world economy recovers and central banks globally start tightening monetary policy, the BOJ may not move along with them, making the yen weaken naturally."

Domestic demand leads rise

Japan's expansion was led by domestic demand, which contributed 0.6 percentage point to growth, the first positive impact in seven quarters, as a recovery in exports and subsidies for energy-efficient goods fueled domestic capital spending.

Corporate investment rose 1.0 percent, the first gain since Q1 of 2008, but less than a forecast for a 1.5 percent gain.

Private consumption also gained 0.7 percent, faster than a 0.6 percent rise the previous quarter and more than double the median estimate for a 0.3 percent gain as government subsidies on cars and electronics that consume less energy lured shoppers.

Economists say private consumption could slow in the first half of this year as salaries and bonuses aren't likely to start rising until the second half of the year.

External demand contributed 0.5 percentage point to GDP growth, matching the median estimate and more than a 0.3 percentage point contribution in the previous quarter.

Economists polled by Reuters before the release of the fourth quarter GDP said they expected growth to slow to 0.3 percent in January-March and 0.4 percent in the following quarter partly as the effects of stimulus begin to taper off.

The BOJ is set to keep interest rates on hold near zero and hold off on any new policy initiatives when it meets for a two-day meeting that ends on Thursday.