Nov. 14 (Bloomberg) -- Japan's economy grew for a seventh quarter, the longest expansion since 1997, as manufacturers increased spending on equipment to meet higher overseas orders for flat-panel displays, cell phones and DVD players. Real gross domestic product, adjusted for changes in consumer prices, rose 0.6 percent in the third quarter from the previous three months, the Cabinet Office said in Tokyo. That was twice the median forecast in a Bloomberg News survey of 38 economists and slower than 0.9 percent growth in the second quarter. The economy grew at an annual 2.2 percent pace. Rising profits at exporters including Sharp Corp. and Murata Manufacturing Co. are helping the world's second-largest economy sustain a recovery from its third recession since 1991. Capital spending and exports accounted for all of the growth in the $4.6 trillion economy, making up for stagnating consumer spending.
``The trend is definitely improving in digital electronic products, especially mobile phones, and companies are introducing new products'' to fill growing overseas orders, said Murata President Yasutaka Murata. Japanese exporters are getting a boost from a global recovery. Germany's economy, the world's third-largest, returned to growth in the third quarter with a 0.2 percent expansion, a report yesterday showed. The U.S. economy, the world's largest, grew at an annual 7.2 percent pace in the same period. To keep the recovery going, Prime Minister Junichiro Koizumi and his newly re-elected ruling Liberal Democratic Party must spark domestic demand by halting five years of falling prices and cleaning up an estimated 44.5 trillion yen ($411 billion) of bad loans clogging the financial system, economists say.
Yen Gains
``The government and the Bank of Japan need to work together to ease deflation,'' Chief Cabinet Secretary Yasuo Fukuda said. ``Conditions haven't changed.'' Without adjusting for falling prices, Japan's economy didn't grow in the third quarter from the previous three months, today's report showed. Prices as measured by the GDP deflator fell 2.7 percent from a year earlier. The yen rose to 108.07 to the dollar at 3:15 p.m. in Tokyo from 108.14 immediately before the report's release and from 108.11 late yesterday in New York. The yen's 10 percent gain against the dollar this year is making Koizumi's job harder by lowering prices of imported goods and reducing the earnings of exporters.
`No. 1 Risk'
``The rising yen is the No. 1 risk for the economy,'' said Masaki Kuwahara, an economist at Nomura Research Institute. The Nikkei 225 Stock Average fell 1.7 percent to 10,167.06 at the 3 p.m. close in Tokyo after an earnings forecast by Wal-Mart Stores Inc. raised concern about slowing consumer demand in the U.S., Japan's biggest export market. The Nikkei has jumped 34 percent from a two-decade low on April 28, led by exporters. ``Prices are falling and consumer spending is weak, which will damp investor sentiment,'' said Naohiko Sasaki, co-head of investments at Kokusai Asset Management Co. in Tokyo, which manages the equivalent of $23.6 billion in equities. Capital spending rose 2.8 percent in the third quarter, today's report showed, exceeding economists' expectations of a 1 percent gain. Exports also rose 2.8 percent. Japan's Murata Manufacturing, the world's biggest maker of ceramic capacitors to regulate electricity in mobile phones and computers, on Monday raised its group net income forecast for the year ending March 31 by 6.8 percent to 39.5 billion yen. It plans to increase capital spending by 87 percent this year.
Export Growth
Matsushita Electric Industrial Co., the world's largest consumer-electronics maker by sales, said net profit for the three months ended Sept. 30 rose 45 percent because of higher demand for its Panasonic flat-screen televisions and DVD players. ``Exports are proceeding at a high level and will continue to show moderate growth, thanks to the U.S. and China,'' said Hisashi Yamada, senior economist at Japan Research Institute Ltd. The Bank of Japan has sold 16.2 trillion yen to October to stem the yen's gains against the dollar and keep the export-led recovery going. Some companies have said the government hasn't done enough. ``There have been volatile moves in the exchange rate, and that's worrying,'' said Shin Kanada, managing executive officer at Toyota Motor Corp., the world's third-biggest automaker. Kawasaki Heavy Industries Ltd., Japan's second-largest heavy machinery maker, last week slashed its annual profit forecast by half to 4 billion yen in the year ending March 31 because of a stronger yen.
Machinery Orders
Capital spending shows signs of faltering. Machinery orders, which point to capital spending in about six months, fell for a third month in September, a report this week showed. Rising exports haven't sparked consumer spending, which makes up more than half the economy. Personal consumption was unchanged in the third quarter, according to today's report. Retail sales fell 0.7 percent in the third quarter after the government raised the tobacco tax and increased the required contribution toward medical costs. The coolest summer in a decade also hurt sales of air-conditioners, bathing suits and other seasonal items at retailers Aeon Co. and Mitsukoshi Ltd. Mitsukoshi, Japan's third-largest department store operator, last month said its half-year profit dropped 20 percent, partly after closing unprofitable stores and sales fell from the cold summer.
Zero Rates
Companies that rely on domestic demand have been hurt by five years of falling consumer prices, which have cut the value of assets, eroded profits and made it harder to pay debt. Bank of Japan policy board member Kazuo Ueda yesterday said a growing economy won't reverse the slide in consumer prices, which started in April 1998, and he repeated the central bank's 2 1/2- year-old pledge to keep interest rates at zero until consumer prices show a sustained increase. ``The rate of deflation will accelerate in the next fiscal year,'' he said. ``What we aim to achieve is not only to improve the economy but also to stabilize prices.'' While the Nikkei's rally has been led by chip-making equipment maker Advantest Corp., mobile phone service provider KDDI Corp. and other technology-related stocks, retailers, food makers and service providers have lagged. The economy produced 122 trillion yen of goods and services in nominal terms in the third quarter, and 138 trillion yen of goods in real terms. Japan's annual gross domestic product is 499.3 trillion yen, in seasonally adjusted nominal terms.
From a year earlier, the economy expanded 2.5 percent in real terms and shrank 0.3 percent in nominal terms. The economy is smaller now than it was in 1996 because of deflation. The expansion has been a boon to the political fortunes of Koizumi and his ruling Liberal Democratic Party, which kept its majority in lower house elections on Sunday, winning 244 of the 480 seats. LDP prime ministers have governed Japan for 45 of the past 48 years. ///www.bloomberg.com