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Capex helps Japan dodge technical recession; pressure on BOJ eases a little

FXStreet (Mumbai) - Japan’s initial estimate of a contraction in the third quarter was revised to an annualized expansion of 1.0 percent. The upgrade was possible all thanks to an increase in capital expenditure. With the GDP revised upward, Japan has manged to avoid technical recession for now.

The initial GDP data for the July-September quarter had shown the economy contracting (0.8 percent) for the second straight quarter and had dimmed policy maker’s hope of pulling the economy out of stagnation and putting it back on the recovery track.

Today’s data suggests the economy has actually performed better than what earlier data had indicated. The figure released today exceeded the median market forecast for 0.1 percent growth.

Upward revision supported by increase in capex

PM Shinzo Abe had stepped up pressures on companies to invest more of their record profits to initiate the economy’s recovery process.The upward revision has been facilitated by capital expenditure which was revised up the 1.3 percent fall estimated earlier.It seems companies are implementing their plans to step up capital expenditure.

However,analysts have warned against getting hopes too high.The upgrade was also aided by a slower-than-expected fall in inventory,signifying that weak demand is making it extremely difficult for companies to sell goods.

Government may introduce supplementary budget to assist recovery

The economy hardly showed any growth in the first half of the fiscal with the economy contracting 0.5 percent in April-June quarter. Going by the situation now, the economy needs to expand an annualized 3 percent in each of the remaining quarters to meet the 1.5 percent growth in the year to March 2016. Economy minister Amari himself feels this GDP target to be "quite ambitious."
Growth will likely be hindered by weak household spending and exports in the current quarter.This weakening will cause the economy to grow only moderately in the October-December quarter.

True, today’s data will take the pressure off the central bank to opt for immediate easing.The pressure can however be shrugged off only temporarily.The persistently low inflation will be a constant reminder to the BOJ that will have to initiate additional stimulus measures to move closer to the 2 percent inflation target as soon as possible.

The government might choose to introduce a supplementary budget exceeding 3 trillion yen to boost growth. However,this is not likely to show results earlier than April2016.

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