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By Shigeo Kodama

TOKYO (MNI) – Japan’s gross domestic product for July-September is
expected to show a fourth straight quarterly increase, up a real 0.6% on
quarter or an annualized 2.5%, thanks largely to last-minute buying of
automobiles and tobacco, a survey of economists conducted by Market News
International found.

This follows GDP growth of +0.4% q/q (+1.5% annualized) in
April-June, +1.2% (+5.0%) in January-March and +0.9% (+3.4%) in the
final quarter of 2009.

But GDP for October-December 2010 is likely to post a contraction,
in payback for high durable goods spending in the previous quarter.

The data will be released Monday.

Takehiro Sato, chief economist at Morgan Stanley MUFG, said, “The
July-September GDP likely accelerated because some government policy
measures and record high temperature appears to have pushed up personal
consumption, but that is just temporary. The GDP will probably contract
in October-December after strong consumption in July-September.”

The July-September growth was led by personal consumption, but net
exports, which had supported the modest economic recovery until
recently, lost some steam.

Personal consumption is expected to have increased by 0.9% on
quarter, the highest gain since +1.3% in April-June 2009.

Economists said personal consumption was raised by some temporary
factors.

Consumers rushed to car dealerships before the government ended
providing subsidies for buying energy-efficient vehicles in September
(lower tax rates or tax exemptions still apply for buying and owning
hybrid and other low-emission vehicles through early 2012).

New vehicle sales fell 4.1% from a year earlier to 308,663 units in
September.

New vehicle sales in Japan excluding mini vehicles (with engine
displacement of less than 660 cc) surged 46.7% on year to 290,789 in
August, posting the 13th straight month of year-on-year gains and the
highest rise since July 1969, when sales jumped 64.3%.

Consumer spending was also boosted by last-minute buying of
cigarettes before the Oct. 1 tobacco tax hike and strong retail sales of
summer clothing and beverages triggered by killer heat waves.

Business investment in equipment is likely to show a steady 0.9%
gain on quarter, marking increases for four straight quarters, thanks to
recovery in corporate profits.

Core private-sector machinery orders, a leading indicator of
capital investment, are estimated to have posted gains for the fourth
consecutive quarter in July-September.

Housing investment is also expected to have risen 1.1% q/q,
reversing from a 1.3% fall in the previous quarter.

In contrast, the uptrend of net exports (exports minus imports)
appears to have weakened after driving the economic recovery for five
quarters through April-June.

The positive contribution of net exports to GDP is expected to have
shrunk to zero in July-September.

According to a Cabinet Office estimate, export volume declined 2.6%
on quarter in July-September, posting the first drop since January-March
2009, when it fell 27.6%. In particular, exports to Asia, which accounts
for the largest share in overall Japanese exports, declined 2.7% q/q in
Q3, posting the largest drop since Q1 of 2009.

As for the broadest measure of price developments, the GDP deflator
is forecast to have dropped 1.6% from a year earlier in July-September,
gradually improving from -1.7% in April-June and -2.8% in January-March.

Many economists think relatively high Q3 GDP growth, above Japan’s
potential annual growth of around +0.5%, is unlikely to continue because
personal consumption, the largest component of GDP, is expected to show
a decline in October-December after a temporary surge in auto and
tobacco sales in the previous quarter.

Ryutaro Kono, chief economist at BNP Paribas Securities, forecasts
such factors to push down the Q4 GDP by 0.3% percentage point, and the
GDP will show an annualized 1.7% drop, showing the first drop since
July-September 2009, when GDP contracted by 0.3%.

Naoki Murakami, chief economist at Monex Inc, thinks Japan’s
economy has slipped into a slight downturn but said it should be able to
return to a recovery track.

skodama@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4838 **

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