Japan Jumps Back From The Brink

JAPAN'S GDP apparently grew at an annual rate of 3.7 per cent in the December quarter, seemingly in dramatic rebuttal of fears the world's second largest economy was slipping back into recession.

Unfortunately, although the news helped to send the Tokyo share market almost 2.8 per cent higher yesterday, few among the more sober analysts think the numbers paint a faithful picture of the economy's condition.

Japanese output grew a real (deflation-adjusted) 0.9 per cent for the September quarter, the fastest rate of expansion in 12months, spurred on by strong export performance and a 2.9 per cent increase in capital expenditure.

Every sector of the Tokyo Stock Exchange's first board rebounded yesterday to push the benchmark Nikkei 225 index to a close of 13,433 points, a rise of 365 points on the day, or 2.79 per cent.

Some broking strategists, such as Yumi Nishimura at Daiwa Securities, took the preliminary estimate to "verify that even if North America slows down, Japan's growth can be driven by Asia and other regions".

Economists who have to explain the numbers, rather than sell stock on the strength of them, were more circumspect.

Mizuho Securities senior economist Naoki Iizuka even suggested capital expenditure growth of almost 3 per cent, quarter on quarter, could disappear completely upon revision.

"The capex growth is likely to be revised to about 1 per cent but it could even be zero per cent." Mr Iizuka explained that one reason economists took Japan's preliminary GDP figures with a fistful of salt - apart from a track record showing them often wildly at variance with revised estimates - was that the statistical compilation was substantially incomplete and heavily biased to the supply side of the economy.

Once demand was fully factored into the revised numbers, due out on March 12, Mr Iizuka expected them to show the economy in a much less ebullient mood.

Some respected analysts, including Takehiro Sato at Morgan Stanley Japan, have said recently that if, as some official forecasts already predict, Japanese industrial production falls in the current quarter, the country will have returned to recession.

The picture painted by the December estimates released yesterday by the Cabinet Office was at such variance with the general glumness that has settled on the economy in recent months that even ministers appeared to have difficulty believing it.

"The GDP data have confirmed that the Japanese economic recovery is continuing," Economy Minister Hiroko Ota said, carefully talking the Government's official line.

"But I'm aware that downside risks, such as housing investment (which collapsed after July, a malaise now spreading to some areas of commercial property) and the US economy, are increasing."

Finance Minister Fukushiro Nukaga said: "The numbers were good, but there are grounds for concern. We need to very closely watch the situation."

After the September and June quarter preliminary GDP figures were revised heavily downwards, the Government adjusted its growth estimate for the budget year ending March 31, from 2.1 per cent to 1.3 per cent.

The apparent December growth rate puts the economy back on track to meet the original projection.

One thing already clear is that the Bank of Japan will not be influenced by yesterday's figures in its decision on interest rates.

Governor Toshiko Fukui has made it clear the bank does not rely much on GDP estimates.

The bank's policy board is odds-on to leave the official rate at 0.5 per cent today and the bond market is still indicating a rate cut in the second half of this year, in expectation the BoJ will then be struggling with recessionary pressures.

The Autralian

Posted in: World News