Japanese GDP Growth In Q3 Surprises: Due To Increased Demand Or Inventory Building?

The Japanese economy grew more than expected in the third quarter.  The annual rate of increase was 4.79% continuing the recovery that began in the second quarter with an annual rate of increase of 2.72%.  The annual rates of change in private consumption and fixed investment and the annual rate of difference in net exports are show in the first chart. Japan still has a long way to go to recoup the losses from the recent deep depression.  The annual rate of real GDP in the third quarter was 531.3 trillion yen, compared the 569.1 trillion yen reached in the first quarter of 2008.

Although both net exports and private consumption continued to increase in the third quarter, their annual rates of increase were lower than those in the second quarter.  Even with a lower rate decline in Gross Fixed Domestic Investment, from 10.5% in the second quarter to 1.3 % in the third quarter, the net effect of these factors does not appear to account for the sharp increase reported for total GDP in the third quarter.  It should be noted that the data are preliminary and some of the components, notably the change in inventories, is only updated during the 2nd preliminary release.  Given the volatility and the large positive and negative contributions of inventory changes to total growth, as shown in the second chart, it is highly likely that the missing element in Japan's third quarter growth was due to inventory accumulation.

Deflation continues to characterize the Japanese economy.  The third chart shows GDP in nominal and real terms since 2000 when real GDP began to exceed nominal, indicating a declining price level.