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GDP up 0.6% in July-September quarter, growth at annualized 2.6%

After revised statistics showed that Japan’s GDP shrank 0.3% (-1.2% annualized) in the quarter to April, statistics released by the Cabinet Office on Tuesday showing that the economy grew 0.6% in the July-September quarter were much welcomed.

We do need to bear in mind that these are preliminary GDP figures. Preliminary GDP estimates of the April-June quarter showed a 0.1% increase, which was revised downward quite strongly to the 0.3% decrease.

Where did the growth come from? The Cabinet Office tells us that strong exports to Asian countries coupled with a ‘modest’ rise in private consumption helped push the economy back into the black last quarter. Exports pushed GDP up 0.4% from the previous quarter while domestic demand led to a 0.2% increase in GDP. Capital spending pitched in a bit as well, finally. It showed a 1.7% increase over the previous quarter, for its first rise in three quarters.

If this data remains unchanged GDP needs to grow at a 0.9% pace (3.7% annualized) in each of the remaining two quarters in order to hit the government’s target of a 2.1% GDP growth in real terms for fiscal 2007.

That won’t be easy. At a press conference on Tuesday, Economic and Fiscal Policy Minister Hiroko Ota told reporters, “A significant fall in housing investment and other unexpected developments have pushed down (economic growth)…We have to closely watch how much of an impact the subprime problem will have on the U.S. real economy.”

1. In the July-September quarter, housing investment fell 7.8%, showing its largest decrease in 10 years.

2. In September, exports to the US slowed for the first time in four years, which seems to be a warning sign.

Japan Economy Watch, agreeing with us Japan cannot rely on domestic demand to fuel GDP growth while a population decline kicks in, says that Japan’s economy “is dependent on exports for the growth it gets, and when exports slow, as they may well be about to, then watch out. This is what all the current sentiment indexes and other short term indicators seem to be telling us right now.”

In an editorial published on Wednesday entitled Strong GDP Data Does Not Warrant Optimism, the Nikkei warns of yet another risk factor:

The key risk factors for the Japanese economy that demand special attention are clear: the ongoing correction in the U.S. housing sector and the weakening of the dollar against the yen.

More to come…

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