Annualized Growth of 1.3% in the July-September Quarter

The GDP statistics for the July-September quarter of 2005 (first preliminary figures due to be published on November 11), are likely to show positive real economic growth of 0.3% on the previous quarter (equivalent to an annualized rate of +1.3%), indicating that the relatively strong growth recorded in the first half of the year, centering on consumer spending, has slowed. However, thanks to the continued substantial growth of capital investment and recovery of exports, it is thought that positive growth has been maintained (so that growth will have remained positive for four consecutive quarters) and reached 2.8% on the same quarter of 2004. Overall, the statistics are likely to show that the foundations of the Japanese economy are growing firmer.

Movements of the Major Elements of Demand
(A) Consumer Spending (Real: -0.1% on Previous Quarter, -0.3% Annualized)

The statistics are set to show that the rapid growth recorded in the first half of 2005 has slowed and that consumer spending has remained virtually unchanged as compared with the April-June quarter. This is largely because the pent-up demand (especially for automobiles) that emerged as fears over employment and incomes abated is tailing off, while demand for autumn goods has been slow owing to the hot weather and numerous typhoons in the late summer. Significant growth of spending was confined to a few areas, such as slimline TV sets and personal computers, whose prices continue to fall. Overall, however, consumer spending is thought to have grown by +1.4% as compared with the same quarter of 2004, exceeding the fiscal 2004 average of +1.2%.

(B) Housing Investment (Real: +2.0% on Previous Quarter, +8.1% Annualized)

Housing investment figures are likely to be up on the previous quarter for the first time in three quarters. Although the downward trend continues in the construction of detached housing, as influx of investment money into real estate market grows, construction of large and small apartment blocks in city areas is picking up, greatly boosting overall figures.

(C) Capital Investment (Real: +2.4% on Previous Quarter, +10.2% Annualized)

Capital investment figures are likely to have achieved 2-digit growth for a third quarter in succession. In the manufacturing sector, construction of factories with a view to increasing the added value of domestic production and boosting development capability continues to grow. On the non-manufacturing side, many industries are stepping up investment, with the electric power industry replacing distribution infrastructure, the telecommunications sector building and improving optic fiber networks, the transportation industry expanding warehousing and distribution centers, department stores improving or undertaking extensive remodeling of stores in major cities and financial institutions stepping up investment in information technology. The breadth of demand for investment is steadily increasing.

(D) Public Investment (Real: +0.9% on Previous Quarter, +3.6% Annualized)

Although public investment continues to fall, it appears that reconstruction projects following natural disasters in the Hokuriku Region, large-scale projects initiated by the former Japan Public Highway Corporation (projects relating to the New Tomei Expressway, the installation of ETC toll collection equipment, the construction of tunnels for the Shuto Expressway), the remodeling of hospitals, prisons and government offices, and other public investment projects have all begun to make headway at once, and that the pace of decline in overall investment has slowed. The figures are set to show positive growth on the April-June quarter.

(E) Net Exports (Real: Contribution to Growth on Previous Quarter: -0.1 points, Annualized Contribution: -0.4 points)

Exports figures are set to show 2-digit annualized growth for a second quarter, (+2.8% growth on the previous quarter, equivalent to an annualized rate of +11.6%). Although the growth of shipments to the United States, which account for more than 20% of total exports, has slowed, especially in the area of automobiles, shipments to China, which weakened in the April-June quarter, have shown a rapid recovery in a wide range of categories. The continued growth of shipments to countries that supply Japan with natural resources and are benefiting from the strong commodities market, has also contributed to the overall recovery of exports. Import figures are also set to show 2-digit annualized growth for a second quarter (+4.4% growth on the previous quarter, equivalent to an annualized rate of +18.9%). Imports of airplanes have contributed to this growth, but basically, the general growth trend has continued as domestic demand has recovered and the international division of labor has come into full operation.
Besides airplanes, the growth of imports has been particularly noteworthy in the field of personal computers. Although both exports and imports have seen rapid growth, the growth of imports has exceeded that of exports in relative terms, and the contribution of net exports to the economic growth rate is likely to have seen a slight fall.

Thus, although the growth rate is thought to have slowed to some extent in the July-September quarter, two factors suggest that the foundations of the Japanese economy are growing firmer.
(A) With the various pressures for structural adjustment receding, capital investment continues to grow and the upward trend in the number of persons in employment is set become established.
(B) Given that winter bonuses this year are likely to see significant growth (the Keidanren's interim figures for major corporations suggest growth on 2004 of +5.08%), consumer spending is highly likely to revive in the October-December quarter. Provided the upward tendency of share prices is not disrupted, spending by the affluent classes can be expected to record a continued, gradual expansion.

Basically, although it is liable to be a little shaky in the short-term fluctuation owing to the continued high price of natural resources, the forthcoming cut in the fixed rate income tax reduction and the fluctuation of the US economy, among other factors, the Japanese economy is set to see a continued recovery. Moreover, on the basis of these predictions for the July-September quarter, it is highly likely that the real economic growth rate for fiscal 2005 as a whole will reach the middle of the 2-3% range.

For more information on the content of this report, please contact: Makoto Ishikawa the Japan Research Institute, Limited.

Tel: 03-3288-4263
E-mail：ishikawa.makoto@jri.co.jp

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