Japan third quarter growth slashed as capex, inventories shrink

TOKYO (Reuters) - Japan’s economy grew much slower than initially estimated in the third quarter, revised data showed, as capital expenditure dried up and companies ran down inventories - renewing concerns about Japan’s growth prospects.

Cranes at a construction site are silhouetted at a commercial area in Tokyo, Japan, August 12, 2016. Picture taken on August 12, 2016. REUTERS/Kim Kyung-Hoon

The Cabinet Office said on Thursday the economy grew at a 1.3 percent annualized rate in July-September, a severe revision from the 2.2 percent annualized growth first estimated and barely over half the median estimate for a 2.4 percent annualized expansion.

Capital expenditure fell 0.4 percent in the quarter, versus the preliminary estimate of 0.0 percent, as steel and real estate companies reduced investment.

On the positive side, consumer spending was revised up and separate data showed services sector sentiment improved. However, weak capital expenditure may temper optimism that the economy could accelerate heading into next year.

“Capex and consumer spending are the twin engines of domestic demand, and I’m not convinced that both will recover strongly,” said Norio Miyagawa, senior economist at Mizuho Securities.

“We have government stimulus and a weak yen, so the economy will continue to grow, but growth will be modest.”

Inventories subtracted 0.3 percentage point from growth, more than a preliminary reading of a 0.1 percentage point contraction, which showed that a recent buildup in inventories was slowing, and a positive sign that companies were able to sell excess goods, Miyagawa said.

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Net exports added 0.3 percentage point to growth in July-September, less than a 0.5 percentage point contribution in the previous quarter.

However, economists were optimistic that exports would pick up in the future as the yen JPY= had fallen to an eight-month low after Donald Trump was elected U.S. president.

Japan’s government has also approved a stimulus package with 7.5 trillion yen of spending on public works, which should marginally support growth next year, economists say.

Private consumption, which accounts for roughly 60 percent of the economy, rose 0.3 percent, versus the preliminary estimate of 0.1 percent growth, as households spent more on food and beverages, TV sets and domestic travel.

The government adopted a new base year for calculating gross domestic product, which lifted nominal GDP closer to the Prime Minister Shinzo Abe’s target level.

The new calculation method, which will include research and development as capital expenditure for the first time to conform with international standards, has been applied to GDP data going back to 1994.

Because of this change, business investment was 17 percent higher last quarter than previous data had suggested, according to Marcel Thieliant, senior Japan economist at Capital Economics in Singapore.

Cabinet Office data showed the new calculation method added 19.2 trillion yen to capital expenditure in fiscal 2015, versus an 18.5 trillion yen contribution in the previous fiscal year.

“The changes have made the capital expenditure data more accurate,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“This won’t change the overall pace of growth. I expect capital expenditure to bottom out in the current quarter.”

An index of sentiment among so-called “economy-watcher” service-sector workers, such as taxi drivers and restaurant staff, rose to 53.5 in November, the highest since March 2014, as a stock market rally and a falling yen made employees more optimistic.

Reporting by Stanley White; Editing by Eric Meijer