TOKYO (MNI) – Japan’s economy contracted by 0.3% on quarter in
October-December 2010, marking the first contraction in five quarters
after a revised 0.8% rise in July-September, hit by what appears to be a
temporary dip in spending and slumping exports, Cabinet Office data
released on Monday showed.

Gross domestic product dropped at an annualized pace of 1.1% in Q4,
compared with a revised 3.3% rise in Q3 (revised down from the initial
reading of +1.1% q/q, or +4.5% annualized).

But the Q4 drop was smaller than the median forecast by economists
for a 0.5% quarter-on-quarter fall, or an annualized rate of 1.9%, with
economist forecasts ranging from 0.2% to 0.8% fall, or at an annualized
pace of 0.8% to 3.1%.

This was due to a larger-than-expected rise in private-sector
inventories and a smaller-than-forecast negative impact of sluggish
exports.

Weak domestic demand pushed down Q4 GDP by 0.2% percentage point
after boosting the economy by 1.0 point in the previous quarter.

Private consumption, which makes up about 55% of GDP, fell 0.7% q/q
in Q4 after rising 0.9% in Q3, making a negative 0.4% percentage point
contribution to GDP (vs. +0.5 point in Q3).

It is believed to be a temporary decline in payback for rush
purchases of automobiles and cigarettes in the July-September before the
government ended its subsidy program for buying and owning
energy-efficient vehicles in September and raised the tobacco tax in
October.

Durable goods spending actually rose 3.1% on quarter in Q4, as
consumers rushed to electronic retail stores before Dec. 1, when the
government tightened its rules for providing reward points for purchases
of TVs, refrigerators and airconditioners/heaters that operate on less
power.

“The effects of electronics spending offset the decline in car
sales,” a Cabinet Office official told reporters. “The GDP was hit by
weak exports, and possibly by the appreciation of the yen.”

Japanese exports to the European Union fell 2.6% in Q4 from Q3
while shipments to the U.S. rose 3.7% and those to Asia edged up 0.3%,
he said.

Business investment in equipment rose 0.9% in Q4, decelerating from
+1.5% in Q3. Capex made a positive contribution by 0.1 percentage point
to Q4 GDP (vs. +0.2 point in Q3).

Private-sector inventory changes added a 0.2 percentage point to
GDP in Q4 after pushing up overall growth by 0.3 percentage point in the
third quarter.

Housing investment rose 3.0% in the fourth quarter, after rising
1.8% q/q in Q3. This category made a positive 0.1 percentage
point contribution.

Net exports made a negative 0.1 percentage point contribution to Q4
GDP after trimming the Q3 growth by 0.1 percentage point.

Exports were down 0.7% on quarter, posting the first quarterly drop
in seven quarters after +1.5% in the previous quarter, while imports
fell 0.1% q/q, marking the first quarterly drop in six quarters (+2.9%
in Q3).

From a year earlier, Q4 GDP rose 2.2%, posting the fourth
consecutive y/y rise but slowing from +4.9% in Q3.

Japan’s economy grew 3.9% in 2010, marking the first y/y rise in
three years after contracting 6.3% in 2009 and 1.2% in 2008.

For the whole of fiscal 2009 that ended in March 2010, the economy
contracted by 2.4% from the previous year, down for the second straight
year after a 4.1% decline in fiscal 2008.

In nominal terms, Q4 GDP shrank 0.6%, or an annualized 2.5%,
posting the first contraction in two quarters after rising 0.6% in Q3.

Deflation decelerated in the fourth quarter, the GDP data showed.

The GDP deflator was down 1.6% from a year earlier after falling
2.1% in the third quarter.

The domestic demand GDP deflator fell 1.0%, compared with a 1.4%
fall the quarter before.

Going forward, economists expect the January-March GDP on an
annualized basis to rise 1.5%, overcoming the temporary economic
downturn for the fourth quarter of 2010.

The Bank of Japan said last month that its policy board had revised
down its fiscal 2011 real GDP forecast to +1.6% from its October
projection of +1.8%.

The board’s median GDP forecast for fiscal 2012 was also revised
down to +2.0% from +2.1% forecast in October.

For current fiscal year, GDP is forecast to rebound sharply to 3.3%
due largely to positive carryover of about 1.9 percentage points from
the previous fiscal year, the BOJ said.

BOJ Governor Masaaki Shirakawa last week said years of deflation
hurting profits and wages here are now abating, thanks to both a
fundamental improvement in Japan’s economic health and rising global
commodity prices.

He also told the Foreign Correspondents’ Club of Japan that despite
expected downward pressure on prices from the planned update on the CPI
base year and revamp of its basket in August, the annual inflation rate
should show a positive figure next year.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4833 **

[TOPICS: M$J$$$,M$A$$$,MAJDS$,MT$$$$]