News Analysis: Japan's Q3 GDP slashed as capex, inventories drive down growth

Japan's economy expanded in the third quarter far less than initial estimates revised data showed Thursday with the government slashing growth due to slumping capital expenditure and shrinking private inventories with analysts pointing to future headwinds for the world's third-largest economy.

The Cabinet Office said Japan's economy grew an annualized 1.3 percent, from a preliminary estimate of a 2.2 percent expansion, in the July-September period, with the revised growth coming in well below median market expectations for expansion of 2.3 percent.

According to the government's revised data, a fall in capital expenditure was one of the major factors in driving down growth, with business spending dropping 0.4 percent in the quarter, compared to the preliminary estimate of 0.03 percent.

Private inventories, meanwhile, trimmed 0.3 percentage points from GDP, following an initial reading of minus 0.1 percent, with the GDP deflator down 0.2 percent on year, from a preliminary reading of minus 0.1 percent.

On the plus side, economists noted, private consumption increased 0.3 percent in the recording period, from a preliminary reading of 0.1 percent and net exports gained 0.3 percent, from an initial estimate of 0.5 percent, as the government's data showed.

Nevertheless, market analysts remained circumspect about the health of the world's third-largest economy, in spite of the government implementing a new method of calculating GDP, in line with international standards introduced in 2008.

"The GDP revisions and the new methods don't change the basic profile of Japan's economy. Basically, Japan's economy is in a gradual recovery since Abenomics kicked in," Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. was quoted as saying.

The new calculation methodology referred to by Kodama means that the value of nominal GDP now also takes into account costs related to research and development and treats defense equipment and royalties from patents as investments and not expenses.

"This (new calculation method) won't change the overall pace of growth. I expect capital expenditure to bottom out in the current quarter," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities, with reference to the new calculation method adding 19.2 trillion yen (169.38 billion U.S. dollars) to capital expenditure in fiscal 2015, compared to 18.5 trillion yen a year earlier.

The value of nominal GDP in fiscal 2015, based on the new method, was upwardly revised to 532.2 trillion yen from 500.6 trillion yen using the new methodology, and slightly closer to Prime Minister Shinzo Abe's target of 600 trillion yen by 2020, although analysts have highlighted increasing economic headwinds facing growth here.

"Corporate confidence has weakened, making businesses cautious about spending. Even with the yen weakening recently, there are still political uncertainties in the U.S. and Europe, deterring companies from making investments. And Japan's potential growth remains low," noted Hiroaki Muto, chief economist at Tokai Tokyo Research Center.

"The recovery may lack strength as weak wage growth limits a recovery in consumer spending and companies remain cautious about increasing spending," added Kodama.

Looking ahead, leading economists here said Japan's economic recovery will remain sluggish despite a weakening yen, as consumers and businesses tighten their purse strings as demand for Japanese goods and services from overseas remains stifled and has had a knock-on effect domestically, amid political uncertainty and jittery markets.

With the effects of the prime minister's "Abenomics" multi-pronged policies to spur growth and tackle deflation being largely unavailing, analysts here said that the government's 7.5 trillion yen stimulus package for spending on public works projects would likely produce minimal returns, while the central bank continues to grapple with negligible inflation.

This, despite the Bank of Japan's new framework for strengthening monetary easing, which came on the heels of the bank plunging its interest rates into negative territory. Enditem