7 December 2001, 09:58  ROUNDUP - Japan's Q3 GDP in line; real deterioration only just begun

TOKYO (AFX-ASIA) - Japan's release of third quarter GDP data was largely in line with expectations, with little immediate reaction in the financial markets, though analysts warned that the real economic deteriation has only just begun. They said the third quarter figure was supported by a downward revision of the second quarter and firm capital expenditure, which lags the economic trend, noting that industrial deterioration is sapping the strength of households. Third quarter to September GDP fell 0.5 pct from the June quarter, when the revised quarter-on-quarter fall was 1.2 pct, for an annualised decline of 2.2 pct, the Cabinet Office said. June quarter GDP was previously reported as a fall of 0.7 pct. Economists had forecast a third quarter decline in GDP of up to 1.0 pct over the previous quarter. However, several had upgraded their estimates by as much as 0.5 percentage points after strong company investment data from the Ministry of Finance this week, leaving the actual result largely in line with expectations. State Minister for Economic and Fiscal Policy Heizo Takenaka said after the release that the economy could fall into a deflationary spiral, citing the spillover impact from corporate restructuring into the household sector. However, he stressed that Japan has not yet entered such a cycle. "These results may mean that built-in restructuring mechanisms, in the form of declining wages and adjustments in the labour-force, are going on more rapidly than expected," he said. "The developments also show deflation in elementary prices such as wages is progressing, rather than a simple price disinflation," he added. Private-sector economists were more direct. "The contraction in the economy has just started. Next year is going to look pretty ugly I think," Commerzbank Securities senior economist Ron Bevacqua said, noting the second quarter revision helped the latest numbers. "It's a temporary blip. I wouldn't read too much into it. The downtrend has really just begun." He said the weakness of the economy is spreading fast to the consumer sector, only worsened by accelerating bankruptcies, while the rise in capital spending will be quickly extinguished. Private consumption in the third quarter fell 1.7 pct from the second, when it fell a revised 1.1 pct. The September quarter decline was the largest since the fourth quarter of 1999, when spending fell 2.3 pct. Non-residential investment, which is considered equivalent to capex, rose 1.1 pct in the third quarter, down from a rise of 2.6 pct in the previous quarter, though many had expected it to fall into negative territory. "We haven't even begun to see the decline in capital expenditure. That is usually the last thing to go," Bevacqua said. "The key point is that we've already started to see consumption fall. The fourth quarter is going to be much worse," he said. "Ten per cent of the workforce works for companies that they well-know are bankrupt and are going to go the way of Aoki. You have to know that they're saying to themselves, 'Sooner or later, I'm going to be out of a job'." Construction firm Aoki Corp filed for court protection from its creditors yesterday after failing to impress with a previous 20-year reform plan. NLI Research Institute economist Taro Saito also noted that the third quarter GDP gained a boost from the lagging capex number. "The headline figure is looking solid but it was simply because capital spending lags behind production activity, which is now falling fairly sharply," Saito said. "IT-related investment peaked out some time ago and overall capital spending may begin to register (a quarter-on-quarter) fall from early as the (December) quarter." Saito said consumer spending is likely to maintain its falling trend as the adverse impact of intensified restructuring by private sector firms is already having an impact on households. Compensation for employees in the third quarter, including salaries, fell 1.7 pct quarter-on-quarter in the third quarter, the largest fall since the third quarter of 1994, when it declined 2.0 pct. "If there is any way out from the current situation in Japan, it will have to be a turnaround in net exports," Saito said. Net exports contributed 0.1 percentage points to growth, the first positive contribution in four quarters. HSBC senior economist Peter Morgan agreed that Japan can only hope for a global economic recovery to help boost exports, with the government unlikely to be able to provide any further impetus. "It shows the economy is back in recession. The source was the weak consumer spending because of the weak labour market and I think it is going to continue being weak going forward," Morgan said. "Overall spending remains weak. I think we will begin to see a sign of exports stabilising, although they still fell sharply in this quarter. IT-related demand is beginning to stabilise. "The only bright point on the horizon would be a global recovery. I don't expect much from the government at this stage. They will go ahead with this second supplementary budget," Morgan said. UBS Warburg chief economist Hiromichi Shirakawa believes the market may underestimated how weak the GDP was because of the second quarter revision. "Consumption will remain weak. On the other hand private capital expenditure rose in the third quarter, supported by software spending, but this will start to deteriorate in the fourth quarter," he said.

© 1999-2024 Forex EuroClub
All rights reserved