Japan's economy grew slightly less than expected in the April-June quarter but economists said healthy capital spending and consumption, along with a brighter picture for exports, suggested a sustained recovery is finally under way.
The third quarter of growth in a row - and signs that deflation may be easing - is good news for Prime Minister Junichiro Koizumi, who is seeking voter approval in a September 11 election for reforms he says are vital to the future of the world's second-biggest economy.
Gross domestic product grew 0.3% in real, price-adjusted terms in April-June from the previous quarter, Cabinet Office data showed today, compared with economists' median forecast of a 0.5% rise. That translated into 1.1% annualised growth, below a consensus market forecast of 2% growth and 3.4% annualised US growth in the same three months.
Domestic demand, such as consumption and capital spending, has replaced exports as the main engine of growth this year as global demand for Japanese goods slowed, notably in China. But exports rebounded in April-June, helped by brisk car sales to the US.
External demand - exports minus imports - became a positive contributor to growth for the first time in four quarters. A drawdown in inventories lopped 0.5 percentage point off GDP growth. That could be a blessing in disguise, however, as manufacturers typically boost output to replenish depleted stock.
Reflecting stubborn deflation, which has dogged the Japanese economy for more than seven years, the GDP deflator fell 0.8% from the same quarter a year earlier. The deflator is a tool to discount inflation from the nominal GDP and arrive at a real rate of growth.
Both the government and the Bank of Japan upgraded their economic assessments on Tuesday, declaring that the economy has almost emerged from a soft patch. That, coupled with strong machinery orders data suggesting sustained capital spending growth, has raised optimism about Japan's economic outlook.
Private-sector consumption, the biggest component of Japan's economy and accounting for 55% of GDP, rose 0.7% in the April-June quarter, outperforming a consensus forecast for a 0.4% gain.
Improving job and income conditions and demand for casual clothing triggered by the government's 'Cool Biz' campaign encouraging men to dress down to save on energy costs were behind the robust personal consumption.
The data also showed employee compensation, or wages paid to workers, rose 1.8% year-on-year, the largest growth in 31 quarters due to the growing number of full-time employees.
Capital spending, which accounts for around 16% of GDP, rose 2.2%, higher than a market forecast of a 1.6% increase, as cash-rich firms channelled their profits into strategic investments.
Analyst said that the figures confirm that the Japanese economy continues to recover moderately and suggest the July-September figures will likely show further growth.
