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Japan’s economy in the July-September period grew at an annualized 2.0 percent in real terms from the previous quarter, roughly twice as vigorously as the average growth forecast by private-sector economists. While the economy expanded for the seventh straight quarter and financial markets, including the stock market, reacted positively to the economic data, a careful look at a preliminary report issued by the Cabinet Office does not warrant optimism.

The government hopes that personal spending, which accounts for slightly more than half of gross domestic product, will serve as an engine of economic growth. But in the latest quarter, it shrank by 0.7 percent from the previous quarter, which had seen personal spending grow by 0.5 percent.

While the economy in the July-September period grew by 0.5 percent in real terms from the previous quarter, domestic demand contributed to only one-fifth of the GDP growth, with the remaining four-fifths coming from external demand.

The decline in personal spending is attributed to a cooler-than-normal summer, which discouraged shopping and traveling. But attention should be paid to the fact that growth in per capita wages has stalled. According to statistics by the labor ministry, real wages at firms employing five or more people declined by 0.6 percent in July, 1.8 percent in August and 1.2 percent from a year before.

For the latest quarter, the GDP deflator, a broad measure of price trends, went down by 0.8 percent from a year before, indicating that deflationary pressure remains strong.

Plant and equipment spending by corporations grew by 2.9 percent in the July-September period from the previous quarter. But the figure was lower than the respective 3.5 percent and 3.7 percent growth logged for April-July and January-March.

Exports in the latest quarter expanded by 2.7 percent due to a weak yen and strong demand from the United States and China. But the U.S. economy’s growth rate in July-September period, at an annualized 1.6 percent, was the lowest since the first quarter of 2003. The Bank of Japan, which raised its key (overnight call) rate to 0.25 percent in July, needs to be cautious in deciding on its next move.

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