Never underestimate Japan’s capacity to wheel out a surprise every now and then — witness the short-squeeze orgy that unfolded in the normally dull Japanese government bond market in recent weeks. And so, on Monday, the `land of the setting sun’ managed to turn out surprisingly strong economic growth figures.
And just to add a surprise before the surprise, Masayuki Naoshima, the trade minister, leaked economic growth data more than 30 minutes before the official release. According to local media reports, Naoshima began an 8am speech to oil industry executives by saying that “the third-quarter GDP figures have just been announced” and then gave details. The official release was not until 8:50am.
As the FT reported:
Governments take extreme care over the release of market sensitive data and the leak highlights the inexperience of the DPJ government, which took office in September.
“I honestly didn’t know it was due to be released at 8:50am so I thought it was OK to talk about it,” Mr Naoshima told reporters. “I apologise for causing trouble.”
While the leak created potential for insider trading, the GDP news did not appear to reach the market before its official release. The yen, for example, fell slightly against the dollar between 8am and 8:50am, only to rise sharply once the official data came out.
We doubt that savvy traders sat on their hands while contemplating Naoshima’s unintentional leak. Meanwhile, we’re thinking of adding Naoshima to FT Alphaville’s small but growing list of Japanese “ministers for disruption“.
But anyway, the official statement showed that Japan’s economy grew at a stronger-than-expected annualised rate of 4.8 per cent in the third quarter, up 1.2 per cent from the previous quarter and way above economists’ consensus forecast of 2.6 per cent growth, as fiscal stimulus supported consumer spending and net exports rose.
However — and it’s a big “however” — the temporary process of rebuilding inventories was also a big contributor and, as the FT notes, with the imminent expiry of stimulus programmes such as subsidies to scrap cars, “many economists are downbeat on growth in the first half of 2010″.
Also weighing on sentiment, debt markets are bracing for a flood of JGB issuance to meet the government’s ambitious spending plans over the next year.
Indeed, Japan’s prime minister Yukio Hatoyama said at the weekend that the state of the economy was still “worrisome” and that another supplementary budget was “probably” warranted — meaning extra spending, and by implication, more JGB issuance. However, finance minister Hirohisa Fujii had previously said that Monday’s GDP release would be important in deciding whether to add to fiscal stimulus this year.
While the GDP numbers were certainly strong, some economists say the concerns about a slowdown in 2010 are still likely to tip the government towards additional spending. And Hatoyama’s DPJ-led government has committed itself to consumption-boosting measures aimed at increasing household budgets, such as cash benefits for parents.
Commenting on the GDP figures, RBS Japan’s RuiXue Xu says that the likelihood of a double-dip in the economy has lessened as long as the effects of economic stimulus measures continue and overseas demand remains stable. “But the output gap maintains at a low level of -6.3% or Y33trn ($368bn). This indicates that the price environment and the Bank of Japan’s accommodative monetary policy still have a long way to go before normalisation”.
The FT notes that about one third of Japan’s Q3 increase in GDP was due to growth in private consumption, one-third was due to increased inventories, and one-third came from net exports, adding:
There was one encouraging sign for future growth — business investment turned positive for the first time in six quarters — but housing investment continued to fall.
In the shorter term, Japan is likely to remain dependent on the strength of export markets such as China, and the degree to which those exports give business the confidence to invest, notes the FT. The real concern for exporters, though, is the strength of the yen, which rose after the release of the GDP data to trade at Y89.6 to the dollar.
Related links:
More fun with JGBs, more headaches for Japan - FT Alphaville
Japan, Einhorn and ‘tontine’ fantasies – FT Alphaville
Japan’s sovereign debt crisis looms – FTfm
Is the sun setting on Japan? – Barron’s