Japan's economic growth slows sharply

Japan's slowed sharply in the third quarter as capital expenditure and exports, the key driver of the recovery so far, faltered badly but there were more hopeful signs on consumer spending, drawing cheers from investors yesterday.

The government said third-quarter GDP grew 0.1 percent from the second quarter for an annualized rate of 0.3 percent, well short of analyst forecasts for 0.5 percent and 2.1 percent.

In the three months to June, the country notched up growth of 0.3 percent and 1.3 percent, so while the latest figures show Japan expanding for a sixth consecutive quarter, it was also at the slowest pace in the current recovery.

Both the yen and stocks were sold off initially on the news but then bounced back strongly as the markets focused on the consumer spending figures -- up 0.9 percent after a gain of 0.8 percent in the second quarter.

In the hope that consumer spending might make up for the slower pace of growth in exports and capital expenditure, investors pushed the Nikkei-225 index up 173.06 points or 1.60 percent to close at 11,019.98, off a low of 10,841.43.

The yen weakened to 106.70 to the dollar from 106.50 earlier as the figures came through but then recovered strongly to trade at 105.97 in the afternoon.

"The underlying situation may not be as bad as the headline figure shows," said Satoru Ogasawara, currency strategist at CSFB. "One reason is that consumer spending came out quite strong."

Consumption been supported by both steady purchases by wealthy families and an improvement in salaries and benefits now that major firms have completed the most drastic part of their restructuring, allowing households a greater sense of confidence and security.

On the negative side, corporate spending fell 0.2 percent after rising 0.6 percent in the April-June quarter while exports rose only 0.4 percent after a gain of 3.6 percent.

While figures disappointed, analysts said they can be explained by the need to cut inventories and the soft spot does not necessarily mean that overall growth is compromized.

"Basically we have not changed our view that the economy is in a slight correction [after earlier sharp growth] during the current uptrend," Economic Minister Heizo Takenaka told reporters.

Takenaka Japanese exports had been dragged down by a temporary dip in US consumer sentiment in the second quarter.

In the three months to September, exports grew for an 11th consecutive quarter but the gain of 0.4 percent was the smallest increase. Imports rose a faster 2.7 percent after a rise of 2.3 percent.