TOKYO (AFP) - Japan's economy 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.
The government said Friday that third quarter gross domestic product (GDP) grew 0.1 percent from the second 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 has 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.
The government said the rise in consumer spending came as the Athens Olympics in August boosted sales of plasma televisions and DVD recorders while a scorching hot summer increased demand for air conditioners.
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 the 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 compromised.
"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.
Dai-ichi Life Research Institute chief economist Yoshikiyo Shimamine said companies were scaling back on investment mainly to adjust their inventories.
"The most surprising thing was the drop in corporate capital spending but I don't think companies have completely stopped investing. Rather, they are slowing the pace of investment to adjust their inventory," Shimamine said.
Takenaka said Japanese exports had been dragged down by a temporary dip in US consumer sentiment which had begun 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.
This led to 0.2 percentage point negative contribution from net foreign demand to total output growth, the first such drag in two years.
Ryutaro Kono, chief economist with BNP Paribas Japan, said he believed that with the United States getting through its soft patch after very strong recent employment growth, Japan should also see an improvement.
"I think the Japanese economic slowdown is very, very temporary. I believe the third quarter is the bottom," Kono said.
GDP, the primary indicator of the status of a national economy, measures the total value of goods and services produced over a particular period of time.
11/12/2004 - 10:57 GMT - AFP