Japan's economy rebounded in the third quarter, growing at an annual pace of 2.6 percent, the government said yesterday, but the outlook for the world's second-largest economy is clouded by worries about a slowdown in the US.
Separately, the Bank of Japan left its key interest rate unchanged at 0.5 percent amid deepening concerns that problems in the US housing market will drag on growth in the US, a vital export market for Japanese companies.
"Looking ahead, there is great concern over whether or not the decline in the US economy will worsen," Economy Minister Hiroko Ota said, adding that the yen's recent strength against the dollar, which erodes exporter earnings, was worrying.
"One important point to look at is how long the yen's current strength will continue," she said. "If that is sustained, there will be an impact on corporate earnings."
The dollar fell below ?110 on Monday for the first time in a year and a half and was trading at ?110.15 yesterday afternoon.
Overall, the GDP report was fairly positive, economists said, indicating that Japan had withstood the impact of the subprime mortgage crisis in the US, at least so far.
Growth bounced back from the previous quarter, when the economy shrank at an annual rate of 1.2 percent, and most areas of the economy -- except housing -- seemed to be doing well.
Business investment rose a preliminary 1.7 percent in the July-September quarter, rebounding from a 2.1 percent decline in the previous quarter as companies bought more general industrial machinery, according to the Cabinet Office.
Solid sales in the travel industry contributed to a 0.3 percent gain in consumer spending, which accounts for more than half of Japan's GDP.
Exports rose 2.9 percent, up for the 10th straight quarter and much faster than a revised 0.9 percent gain in the April-June quarter as Asian nations bought more Japanese goods such as cars and motorcycles.
"Exports were the main factor behind the rise, led by strong growth in shipments to China," said Taro Saito, a senior economist at the NLI Research Institute.
However, the GDP report is by nature a backward-looking report and Saito cautioned that a slowdown in the US would likely limit exports in the future.
The biggest drag on growth was housing investment, which plunged 7.8 percent -- the largest drop since an 11.1 percent tumble in the April-June 1997 quarter -- to mark the third-straight quarterly decline.
Though its contribution to the GDP is small at only 3 percent, the ongoing drop is worrying as it could hurt factory output and business investment by cooling demand for construction materials and durable goods such as refrigerators and TVs.