Tuesday, November 14, 2006

Mixed News in Japan's GDP Report

While Japanese growth of 0.5% (i.e. 2% with the American way of expressing growth, at an annual rate)during the third quarter was a lot weaker than I expected a few months ago, it was higher than most analysts expected recently and it was relatively strong considering other recent weak reports.

Oone of the reasons why growth was weaker was that the second quarter number had been upwardly revised (from 0.2% to 0.4%) due to higher inventories. That limited the gain in inventories this quarter.

But the most important reason for the disappointing growth was an unexpected and significant decline (0.7%) in private consumption. In part this was due to weak wage growth, and in part because of bad weather that kept shoppers home. Bad weather is not likely a permanent factor, so this should be reversed during the fourth quarter. While wage growth have been surprisingly weak given Japan's low unemployment rate, it should pick up soon.

And in any event, real compensation of labor had in fact increased 1.6% in the year to the third quarter(the nominal 1.3% increase deflated with a 0.3% decline in the PCE deflator). While that is hardly great, it certainly isn't weak enough to motivate the mere 0.3% increase over the year in private consumption. So, expect a bounce back (and possibly also a upward revision) in private consumption during Q4. Particularly since the lower oil prices should boost purchasing power among consumers.

And the most important factor behind growth, business investments, continued to soar. While the weak machinery orders number (a leading indicator of business investment) recently published indicates that investment growth will slow during the Q4, the long-term prospects remains healthy given the high level of corporate profits.

Another healthy sign was the continued gradual decline in government demand. The lower burden of government should boost the performance of the Japanese economy.

Japan's demographic situation, with a shrinking work force means that its structural growth rate is relatively low. But, the low level of debt, means that it is in a more favorable cyclical situation than both Europe and particularly America.


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