TOKYO Japan's economy slowed less than expected in July-September and is expected to pick up pace in the current quarter as consumers spend now to beat a tax rise next year, but business investment came in sharply below market forecasts.
The 0.5 percent expansion in July-September compares with the median estimate for a 0.4 percent increase and followed 0.9 percent growth in April-June, data showed on Thursday.
It was a fourth successive quarter of growth, the best run for the world's third-largest economy in three years.
A tighter labor market and signs of rising wages should bolster consumer spending in coming quarters, economists said.
Retail sales are likely to pick up before a sales tax rise in April and stimulus spending should help growth, which bodes well for Prime Minister Shinzo Abe's push to foster self-sustaining growth and end 15 years of mild deflation.
However, capital expenditure growth slowed to 0.2 percent in July-September, well below a median estimate of 0.8 percent and suggesting companies remain reluctant to deliver the increased investment needed to secure a sustained recovery.
"Economic growth is expected to accelerate in the final quarter of this year. Despite the soft headline figure today, there's no need to be pessimistic about the outlook," said Junko Nishioka, chief economist at RBS Securities.
"The government's stimulus package is likely to help boost capital expenditure. The ball is in the government's court so I don't think the Bank of Japan will come under pressure for further monetary easing any time soon."
Annualized third-quarter growth was 1.9 percent, higher than the median forecast of 1.7 percent, Cabinet Office data showed.
Private consumption, which makes up about 60 percent of the economy, grew 0.1 percent in July-September, matching the median estimate and following a revised 0.6 percent growth in April-June as falls in Japanese shares weighed on consumer sentiment.
External demand subtracted 0.5 percentage point from GDP in July-September, more than the median estimate for a 0.4 percentage point subtraction. That follows a revised 0.1 percentage point contribution in the previous quarter.
Exports to Southeast Asia weakened as large capital outflows from the region slowed growth. However, economists expect exports to improve going into next year as overseas economies stabilize.
Inventories contributed 0.4 percentage point to GDP in the third quarter, after detracting 0.1 percentage points in the previous quarter.
Abe's plan is to combine fiscal spending, economic reforms and monetary stimulus to pull Japan out of a decades-long economic slump. ($1 = 99.2400 Japanese yen)
(Additional reporting by Leika Kihara; Editing by John Mair)