Clearly there is a large cyclical component behind what is happening in Japan: That being said, what does cyclical mean here? What is Japan's sustainable growth path? Unfortunately this may be a question which it is only possible to answer with the benefit of hindsight. The important details are that growth has really been coming from an expansion in capacity, that a continuing fall in the dollar would put exports in difficulty, that the big, big unknown - the China slowdown factor - will be important (if in fact there is a slowdown), and that, at the end of the day, everything hangs on the sustainability of the US recovery.
Japan grew by just 0.3 per cent in the September quarter, half the previous estimate, though the economy still appears to be on track for a sustained recovery.
Revised figures from the finance ministry put annualised growth in the quarter at 1.4 per cent, compared with the 2.2 per cent originally estimated, largely because the jump in capital spending was not as high as previously thought. The revised data showed that capital expenditure grew at 0.4 per cent, compared with 6.4 per cent in the quarter to June. Capital expenditure is considered the classic mechanism by which demand for Japanese exports is transmitted to the domestic economy, as businesses stimulate domestic demand through increased investment. Consumer demand, which accounts for 60 per cent of gross domestic product, has held up better than many economists expected, but has long ceased to be a driver of Japanese growth. Mikihiro Matsuoka, economist at Deutsche Bank, said the new figures, which are based on supply as well as demand-side data, painted a more realistic picture of growth.............
Mr Matsuoka said the only risks to the recovery were a sharp slowdown in China or the US, a rapid appreciation of the yen past Y100 to the dollar, or a too-rapid tightening by the conservative Bank of Japan. The yen has appreciated by nearly 10 per cent this year to reach Y107.4 to the dollar on Tuesday in spite of record intervention, though most business leaders consider present levels manageable.
Source: Financial Times