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Wall Street Journal / Biz - Money

Japan’s Economy Boosted by Surge in Capital Spending

Japan’s stronger-than-expected growth offers another sign that Prime Minister Shinzo Abe’s economic policies, assisted by a global upturn, may be helping the nation emerge from years of stagnation.


Megumi Fujikawa

TOKYO—Japan’s stronger-than-expected growth offers another sign that Prime Minister Shinzo Abe’s economic policies, assisted by a global upturn, may be helping the nation emerge from years of stagnation.

A jump in firms’ capital spending amid optimism about the global economic outlook prompted a revision of Japan’s economic growth for the July-September quarter to 2.5% on an annualized basis, compared with an initial estimate of 1.4%, government data released Friday showed.

The figure confirmed that the world’s third-largest economy extended its growth streak to seven quarters, its longest expansion in 16 years, and may feed into recent speculation that the Bank of Japan might follow the global trend toward higher interest rates with a move of its own next year.

Some economists question the sustainability of the current growth trajectory, flagging continued weak consumption, a stretched labor market and an inventory buildup that may not be repeated in the coming quarters.

For now, at least, the news is good.

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The central bank’s aggressive monetary easing—a main pillar of Abenomics—has helped weaken the yen, increase exports and fuel record corporate profits. Exports continued their key role of driving the economy, adding 0.5 percentage point to growth.

The latest data suggest that the feel-good factor for companies is helping lift capital spending too.

Capital expenditure by the private sector rose 1.1% from the previous quarter, compared with an initial estimate of a 0.2% gain. A Finance Ministry survey released last week had pointed to much stronger capital spending in the quarter.

Growth in inventories, another factor that often leads to large revisions in Japan’s GDP data, also contributed to the higher figure. While the inventory figure could point to firms’ optimism about future sales, they could also indicate insufficient demand in the economy.

Economists say they expect the country to see another round of solid growth in the October-December quarter, but many of them are already predicting a deceleration.

Marcel Thieliant, senior Japan economist at Capital Economics, said he expects Japan’s growth to slow to 1.2% in 2018 and 1.0% in 2019.

“The economy is running into capacity constraints and firms are facing mounting staff shortages. The upshot is that the expansion should slow again before long,” Mr. Thieliant said.

Many economists point out that the government’s efforts have yet to spur private consumption. A lack of strong wage growth has been blamed for sluggish spending by consumers.

The revised data showed that private consumption fell 0.5% from the previous quarter, matching the preliminary result.

While economists expect external demand to continue to be a driver of Japan’s economic growth, some warn of a risk that private consumption may weaken further in the October-December quarter, given soft household-spending data for October.

​Hideshige Watanabe, a senior economist at​Sumitomo Mitsui Asset Management, flagged the larger inventories as a sign of weak consumption that will weigh on October-December growth.

He added that without additional signs of strength in consumer prices, strong growth alone wouldn’t push the needle on policy for the BOJ.

Write to Megumi Fujikawa at megumi.fujikawa@wsj.com

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