Japan’s real GDP likely expanded above potential growth pace in Q3

Japan is set to release its third quarter economic growth report on Monday, which is expected to show that the Japanese economy has continued to expand above the potential growth pace. According to a Societe Generale research note, Japan’s real GDP is expected to have grown 0.2 percent sequentially in the September quarter or 0.8 percent q/q on an annualized basis.

This is similar to the 0.7 percent annualized growth seen in the second quarter. Therefore the growth pace has not decelerated and has continued to stay above the possible growth rate of around 0.3 percent for the three straight quarters, noted Societe Generale.

But, the drivers of growth for the third quarter are expected to have altered from the ones seen in the second quarter. Economic stimulus measures approved by the Japanese government in January mainly underpinned the growth in June quarter.

But it is not expected to have supported growth in the third quarter as the large-scale economic stimulus package set by the government in August is unlikely to have had any impact before the quarter ended. This signifies that public demand is not expected to have been strong in the third quarter, said Societe Generale.

The effect of the global economy and markets uncertainties and the steep appreciation of the Japanese yen are expected to have waned in the September quarter. In the June quarter, companies had lowered their inventories and exports in overseas and domestic markets because of the increased caution over uncertainties in the global and domestic economy. But the yen stopped strengthening in the third quarter, and the global economies indicated signs of bottoming out, while exports are expected to have rebounded again.

Therefore, Japan’s economy has expanded above its potential growth rate for three straight quarters, in spite of major headwinds from the global economy. Corporates are expected to have continued with their investment activities, while their plans for capital investment continue to be strong. Secondly, the jobless rate is another economic growth driver. At present, the jobless rate is at around 3 percent. This is expected to be beneficial for Japan’s domestic demand.

“We expect real GDP growth to be roughly +0.6 percent in 2016, similar to 2015, and to thus outpace the potential growth rate for a second consecutive year”, added Societe Generale.

The USD/JPY touched an intra-day low of 106.25, but has trimmed losses to trade at 106.47.00 by 0722 GMT, still 0.3 percent down for the day. The FxWirePro's Hourly Yen Strength Index stood slightly bearish at -78.9389 (lower than the range of -75 and -100 is slightly bearish).