As expected, the Japanese economy rebounded sharply in the September quarter, ending the recession thanks to the impact of the early reconstruction efforts after March’s devastating earthquake and tsunami.
But the outlook remains clouded by the slowing global economy, especially Europe and China, plus the impact of the high yen and Thailand’s floods.
Gross domestic product grew 1.5% in July-September from the previous quarter following three quarters of contraction, the Cabinet Office reported yesterday.
On an annual basis, the economy grew 6%. Both outcomes were around market estimates.
Japan’s economy contracted 2.1% in the April-June period, in the wake the earthquake and tsunami that struck the northeastern coast on March 11.
Markets however ignored this good news and focused on (naturally) events in Europe.
The reception for the new governments in Italy and Greece (both are being formed) was generally positive.
Markets across Asia rose solidly yesterday on hopes that Italy and Greece would no long be as dangerous as they appeared over the last fortnight.
Tokyo’s Nikkei Index added 1.1%, South Korea’s Kospi Composite index climbed 2.1% and the ASX 200 added 0.2% after being up nearly 1% in early trading. Hong Kong’s Hang Seng index added 1.9% and Shanghai closed higher as well, finishing with a 1.9% gain as well.
But the gains could not be sustained in Europe, where markets fell by between half a per cent and more than 2% thanks to a rise in debt costs by Italy (despite selling five billion euros of bonds) and Spain.
That bearish trend continued into the US markets where, despite news that Warren Buffett had bought 5.4% of IBM, the tech giant, at a cost of $US10 billion, shares fell, along with gold and oil.
In Japan, the data shows that a 6.2% rise in exports contributed 0.4 percentage point to growth in the quarter, the first positive contribution in five quarters, thanks to rebound from March’s disasters for the car and electronics industries in particular.
These are the same sectors facing pressure from the Thai floods, which have already seen major car groups, such as Toyota cut production in several regions, including Japan.
Private consumption, which makes up about 60% of the Japanese economy, grew a stronger-than-expected 1%, while business investment was up 1.1% in the quarter. Housing investment rose 5% in the quarter.
Yet investors are more focused on the outlook, with many worried the 3rd quarter growth spurt won’t last.
Credit Suisse economist Hiromichi Shirakawa said last week that Japan had benefited from a sharp increase in exports and industrial production into the early summer.
But he told clients that the economy has “already lost upward momentum since August”.
He wrote that he now expects Japan’s economy to weaken in coming months and forecasts GDP to contract in the fourth quarter.
That forecast is supported in part by the 12.1 trillion yen (around $US157 billion) supplementary budget now being debated in the national parliament.
Reuters said that a poll of economists earlier this month saw growth slowing to 0.5% this quarter (which is the third in the Japanese financial year), with some saying the economy may shrink again as the Thai floods impact Japanese manufacturers there and in Japan and other countries (such as Australia where we import cars made by the likes of Honda and Toyota).
The Bank of Japan will have the growth data available for its two-day meeting starting today. It is not expected to alter policy this week.
Pointing to the coming slowdown, industrial production fell 4% in September, the first monthly drop since March.
And last week, the government reported that Japan’s key economic index fell in September for a second month in a row.
The Cabinet Office said the coincident index, which indicates the current state of the economy, slipped 1.4 points from the previous month to 88.9 in September, against a base of 100 for 2005.
The decline was blamed on the slowdown in the production of cars, televisions and personal computers.
That was blamed on three factors: the slowing in various economies (China and Europe) and the impact of the European debt crisis and the impact of the ending of analogue TV which dragged forward digital TV sales into earlier in the year.
The Cabinet Office says the risk of a slowdown is rising, thanks to the strong yen and the flooding in Thailand.
The drawn-out floods in Thailand are seriously affecting production by Japanese carmakers. Toyota has been hit especially hard.
The company says it will cut production in Japan next month by 30% because of a parts shortage caused by the floods.
That will show up in production and other data and drag activity lower than it will normally be.
