Japan's Economic Expansion

By Satoshi Sugiyama and Leika Kihara
TOKYO (Reuters) – Japan's economy expanded in July-September at a faster pace than initially reported, driven by upward revisions in capital investment and exports, which support near-term interest rate hike expectations by the central bank.

However, a downward revision in consumption highlights the fragile nature of the recovery, leaving uncertainty about the timing of future interest rate increases, with some analysts questioning a December hike.

The economic data will be key considerations for the BOJ during its policy meeting on December 18-19, where a rise in short-term interest rates from the current 0.25% is anticipated by some analysts.

> "While the data supports a December rate hike, the weakness in consumption is concerning," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Revised data from the Cabinet Office showed that GDP rose an annualized 1.2% in the three months to September, surpassing economists' forecasts and the initial estimate of 0.9% growth. This translates to a quarter-on-quarter expansion of 0.3% in price-adjusted terms, compared to the preliminary growth of 0.2% released on November 15.

The upgrade was partly attributed to a smaller-than-expected decline in capital expenditure, down 0.1% in Q3 versus an original estimate of a 0.2% drop, contrasting economists' projections for a 0.1% increase. External demand, defined as exports minus imports, deducted 0.2 percentage points from growth, an improvement from the previously reported 0.4 point drop.

Private consumption, which makes up more than half of Japan's economy, increased by 0.7%, a drop from the preliminary reading of 0.9% growth.

> "While the data doesn't significantly boost rate hike expectations, it won’t impede rate increases either," stated Uichiro Nozaki, an economist at Nomura Securities.

Despite the upward revision, third-quarter GDP growth remains slower than the annualized 2.2% expansion recorded in the April-June period, spurred by a contraction due to disruptions in some auto plants.

The BOJ ended a radical stimulus program in March and raised short-term interest rates to 0.25% in July, believing Japan was on track to sustainably reach its 2% inflation target.

Governor Kazuo Ueda has expressed openness to further rate hikes if the BOJ becomes confident that inflation will consistently remain around 2%, supported by increasing wages and strong domestic demand.

Nozaki predicts slowed consumption in the current quarter but expects a rebound in January-March due to anticipated wage growth. However, some analysts foresee a more challenging economic outlook, citing uncertainties like potential higher tariffs from U.S. President-elect Donald Trump.

> "While improving real wages will bolster consumption, external demand recovery will be muted due to stagnation in overseas growth," commented Masato Koike, a senior economist at Sompo Institute Plus.

He added, "Japan's economy will continue to recover, but the pace will remain modest."

Many market participants predict the BOJ will hike rates again by the end of the current fiscal year in March, although they are split on whether this will occur in December or early next year. The BOJ remains cautious about the timing of another rate hike, given weak consumption, the governor's careful decision-making, and concerns about U.S. economic policy under a second Trump presidency, sources have indicated.