Japan's Economic Growth Slows Amid Mixed Signals

By Makiko Yamazaki and Satoshi Sugiyama

TOKYO (Reuters) – Japan's economy expanded by an annualized 0.9% over the July-September quarter, according to government data released on Friday. This marks a slowdown from the previous three months, primarily due to weak capital spending, although an unexpected rise in consumption provided a positive aspect.

The slower growth underscores the vulnerability of Japan's economy at a time when there are increasing risks of a slowdown in the U.S. and further weakness in China, which could adversely affect exports.

Private consumption, which constitutes more than half of economic output, showed resilience with a 0.9% increase, surpassing the market's expectation of 0.2% and improving from the revised 0.7% growth in the previous quarter.

Economist Kengo Tanahashi from Nomura Securities remarked, "The large increase in consumption was a big surprise," although he noted that it could stem from one-off factors like a recovery in auto production and temporary income tax cuts.

The data suggest a quarterly rise of 0.2%, aligning with economists' median market forecast in a Reuters poll. However, capital spending, a critical component of demand-led growth, declined by 0.2%, reflecting hesitance in machinery investment due to international economic slowdowns.

Net external demand knocked 0.4 points off growth, a deeper decline compared to a 0.1 point negative contribution in the previous quarter.

The Bank of Japan maintained its ultra-low rates last month, observing that conditions for raising rates might soon improve as risks associated with the U.S. economy begin to lessen.

Economy Minister Ryosei Akazawa conveyed optimism stating, "We expect the economy to continue to recover on better employment and wage conditions," but he urged caution regarding potential external risks and market volatility.

Kazutaka Maeda of Meiji Yasuda Research Institute echoed Akazawa's sentiments, warning about possible negative impacts on Japan's exports from potential new tariffs under U.S. President-elect Donald Trump, while also expressing that sustained wage growth could bolster domestic consumption.