Japan's economy has expanded for the second straight quarter, but optimism may not be warranted. Although real gross domestic product for July-September grew 1.2 percent from the previous quarter or at an annualized rate of 4.8 percent — the largest rise since the 5.7 percent annualized growth for January-March 2007 — it may be too early too consider the recovery self-sustainable.
The 0.7 percent quarterly rise in consumer spending, which accounts for about 60 percent of Japan's GDP, was supported by tax cuts on low-emission cars and a reward program for purchasing environment-friendly consumer electronics — steps taken by the previous administration. An array of stimulus efforts like these is losing steam as the funds run out.
Capital investment grew 1.6 percent — the first increase in six quarters. And the mining and industrial production index in September rose 2.1 percent from August — the seventh straight monthly rise.
Exports for July-September increased 6.4 percent from the previous quarter, mainly because of more exports to Asia, including China. But overseas demand pushed the July-September GDP up only 0.4 percent as imports increased. Domestic demand drove the GDP up 0.8 percent — the first positive contribution in six quarters.
Housing investment for July-September dropped 7.7 percent from the previous quarter. Although the unemployment rate in October was down 0.2 percentage point from September at 5.3 percent, many companies are reluctant to increase employment. The domestic demand deflator, an indicator of price trends, dropped 2.6 percent in the July-September quarter from a year before — the largest drop in more than 50 years — raising fears that Japan is heading into deflation. Winter bonuses are forecast to fall between 7.4 percent and 13.8 percent from last year.
The government should promptly adopt and execute a second fiscal 2009 supplementary budget, said to be worth ¥2.7 trillion. As tax revenue will be less than previously anticipated, clever and effective measures must be devised to stimulate demand.