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Japan not in recession after GDP is revised up

Japan’s economy posted positive growth in the third quarter of the year according to the second estimates of GDP growth, cancelling the negative reading of the preliminary estimate. The revised figure means that not only Japan avoided entering technical recession in the third quarter, having contracted by 0.1% q/q in the second quarter, but the upward revision was much stronger than expected.

GDP expanded by 0.3% quarter-on-quarter and by 1.0% at an annualized rate, beating estimates of 0.1% (annualised) and much higher than the initial reading of -0.2% q/q. The upward revision came mostly from higher capital expenditure, which was revised up from -1.3% q/q to 0.6% q/q. Growth was also boosted by inventories declining by less than initially estimated.

The data will be good news for Japan’s Prime Minister Shinzo Abe and his government who are trying to encourage companies to invest more and increase wages to help spur growth and prices. However, a slower decline in inventories highlights the underlying weakness in demand. Higher stockpiles means firms would try to sell them in future months and this may weigh in growth in the fourth quarter.

Private consumption was slightly weaker than in initial estimates, growing by 0.4% q/q versus 0.5% in the preliminary reading. Household consumption has failed to provide the boost to growth that the government had been expecting, despite a fall in the jobless rate. Household spending fell year-on-year in the previous two months and wage growth has also been weaker than expected, making it difficult for the Bank of Japan to meet its growth and inflation projections. Next spring’s wage negotiations will be crucial in determining future consumption and price pressures, and will be watched closely by the Bank.

However, industrial production appears to be rebounding from the summer slump and output rose in both September and October. With some signs of a turnaround in growth, the BoJ is likely to keep monetary policy on hold for the time being as the economy appears more resilient than many had expected.

There are also some positive developments in inflation, despite the BoJ having to push back the timing of when it expects to hit its inflation target twice this year. The GDP deflator remains in positive territory and rose in the third quarter from the previous quarter. CPI excluding food and energy has also been slowly edging higher and November’s dip is likely to have been temporary. While analysts haven’t ruled further monetary easing in 2016, it’s likely the BoJ would need to see more evidence of inflation diverging away from its target.

The yen was lifted by the strong GDP numbers, pushing the dollar below 123 yen by mid-European trading. The dollar was down at 122.97 yen, while the euro was last trading at 133.59 yen.

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