REPEAT: Modest Japan Q3 Growth Seen Despite Spending Slump

Repeats Story Initially Transmitted at 05:06 GMT Oct 31/01:06 EST Oct 31

By Max Sato

     TOKYO (MNI) - Japan's modest economic recovery has continued, with a

rebound in net exports seen offsetting a slump in consumer spending to produce a

Q3 growth rate around the economy's growth potential but much slower than the

unusually strong Q2 expansion.

     The Bank of Japan's real export index rose 1.9% on quarter in

July-September after falling 0.5% in April-June and rising 2.8% in

January-March, indicating net exports will make a positive contribution to Q3

GDP after pushing down Q2 growth by 0.3 percentage point.

     The Cabinet Office will release its preliminary estimate of the gross

domestic product for the July-September quarter at 0850 JST on Nov. 15 (2350 GMT

on Nov. 14).

     "Private consumption slumped and capex was sluggish but exports were

strong. But overall, third quarter GDP growth will be lackluster, said Akiyoshi

Takumori, chief economist at Sumitomo Mitsui Asset Management.

     He forecast a 0.2% quarter-on-quarter rise in Q3 GDP, or an annualized 0.6%

increase, a stark slowdown from the previous quarter. External demand will push

up the total domestic output by 0.4 percentage point while domestic demand will

trim it by 0.2 percentage point, Takumori said.

     Japan's real GDP rose 0.6% on quarter, or an annualized 2.5%, in

April-June, led by strong private consumption and public investment. Domestic

demand added 0.9 percentage point to Q2 GDP while external demand lopped off 0.3

percentage point.

     Both the government and the BOJ estimate Japan's growth potential to be

just under 1%.

     Looking ahead, Takumori said he expected growth to continue in the fourth

quarter.

     "I think current economic growth is strong but weather factors are tending

to pull it down. Factory output is zigzagging on an upward trend while

consumption may not make a quick recovery in the October-December quarter after

typhoons hit for two weekends in a row this month," he said.

     Mitsubishi UFJ Research and Consulting economist Shinichiro Kobayashi

expects solid Q3 GDP growth of 0.4% on quarter, or 1.5% on an annualized basis.

     "While external demand will lead Q3 GDP, domestic demand will slow to

around zero," he said. "There is some solidness underlying the weak Q3

consumption data, so I don't think consumer spending is entering a declining

phase."

     Kobayashi forecast a 0.2% drop on quarter in private consumption in Q3 GDP

after a rise of 0.8% in Q2 and a 1.8% decline in public investment in Q3

following a 6.0% gain in the previous quarter.

     Data released Friday showed a continued quarterly rise in industrial

production for Q3, despite a drop in September, which was caused by slow demand

for the iPhone 8 released in September and a delay in production of the iPhone X

due out in November.

     Industrial production fell a seasonally adjusted 1.1% in September, but

posted the sixth consecutive quarterly gain, up 0.4% in Q3 after a gain of 2.1%

in Q2.

     Based on its survey, METI forecast factory output would rebound 4.7% on

month in October (revised up from +3.5% projected last month) before slipping

0.9% in November. Adjusting for the upward bias in output plans, the METI

projected production would actually rise a more modest 2.4% on month in October.

     "The drop in September was due to slower shipments of smartphone parts to

China. As reported in the press, there are some issues with parts, delaying the

production of the iPhone X, while demand for the iPhone 8 has been slow," a METI

official told MNI.

     "But we heard from manufacturers that they plan to increase production of

electronic parts and devices in October and November."

     Output of electronic parts and devices, a leading category for Japan's

factory output and exports, plunged 5.6% on month in September but rose 1.3% on

quarter in Q3.

     Shipments of capital goods excluding transport equipment -- a key indicator

of the business investment component of GDP -- fell 0.2% on quarter in Q3, the

first quarterly drop in two quarters after +5.0% in Q2, indicating capex in the

Q3 GDP may have slowed down from the 0.5% rise on quarter in Q2 (+0.1 percentage

point contribution to GDP).

     Takumori expects a gain of 0.2% on quarter in capex in Q3 GDP while

Kobayashi sees a similarly low gain of only 0.1%.

     Also on the downside, data released Friday indicated household spending

probably posted a quarter-on-quarter decline, hit by a long stretch of rainy

days in August and typhoon weather in September. In Q2, private consumption rose

0.8% on quarter, pushing up the total domestic output by 0.5 percentage point.

     Real average household spending posted the first year-on-year drop in two

months, down 0.3% in September after a 0.6% rise in August, as stormy weather

during the long weekend dampened spending on leisure and lower temperatures led

to lower purchases of air conditioners.

     But the government maintained its view that spending is on a recovery

trend.

     "We can explain that the decrease in September was due to weather factors,

so we left our assessment unchanged," an official at the Ministry of Internal

Affairs and Communications that compiles household spending data told MNI. 

     The core spending index, which excludes housing, motor vehicles and other

volatile items (close to private consumption patterns in GDP data) rose 0.1% on

month in September on a seasonally adjusted basis, the first month-on-month rise

in three months after -0.1% in August and -0.3% in July.

     Consumer sentiment is flat, due partly to weak summer bonuses, but Friday's

data showed that rising job offers and a gradual pickup in incomes are

supporting consumption.

     Average real income of households with salaried workers rose 2.1% on year

in September, the fourth consecutive rise after a 0.2% rise in August and a

sharp 3.5% gain in July.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com