Japan's Economic Growth Rebounds on Consumer Spending (Update6)

By Lily Nonomiya
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Nov. 13 (Bloomberg) -- Japan's economy grew faster than economists forecast in the third quarter as an unexpected increase in consumer spending countered a drop in housing construction.

The world's second-largest economy expanded an annualized 2.6 percent in the three months ended Sept. 30 after a revised 1.6 percent contraction in the previous period, the Cabinet Office said in Tokyo today. The median estimate of 41 economists surveyed by Bloomberg News was for a 1.8 percent increase.

The Bank of Japan kept its benchmark interest rate at 0.5 percent today as the biggest drop in housing investment in a decade and slowing shipments overseas threaten the expansion. Bond yields fell to the lowest since January 2006 on speculation that a cooling global economy will reduce demand for exports, the main driver of growth.

``The chances of a year-end rate increase are dwindling with domestic demand so weak and the risks for the U.S. economy growing,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The report underscores how export-reliant the economy is.''

Net exports, or the difference between exports and imports, contributed 0.4 percentage point to growth. Domestic demand added 0.2 percentage point.

The yield on the benchmark 10-year bond fell 2.5 basis points to 1.49 percent at 4:59 p.m. in Tokyo. The yen traded at 110.11 per dollar from 109.63 before the report was released.

Second-Quarter Revision

From the previous quarter the economy grew 0.6 percent, more than the 0.5 percent forecast by economists. The second- quarter contraction was larger than the annualized 1.2 percent estimated in September.

The yen has risen more than 4 percent against the dollar this month, eroding earnings at exporters. Federal Reserve Chairman Ben S. Bernanke said last week that that growth in the world's largest economy will ``slow noticeably'' this quarter.

Export growth is already waning. Shipments overseas grew at the slowest pace in two years in September.

``We can't rule out the risk that the U.S. economy will deteriorate more than expected,'' Bank of Japan Governor Toshihiko Fukui said after the rate decision today.

The U.S. economy, Japan's biggest market, is expected to expand at a 1.5 percent annual pace in the fourth quarter, less than half that of the third quarter, economists surveyed this month said.

Consumer Spending

Consumer spending, accounting for more than half of Japan's economy, grew 0.3 percent from 0.2 percent in the second quarter. Outlays by households are at risk because wages fell in nine of the 10 months to September and unemployment rose to 4 percent from 3.6 percent two months earlier.

``Consumer spending isn't that strong yet,'' Japan's Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo today. ``It is still weak enough that it can be affected by bad weather because wage growth has stalled.''

Investment in housing fell 7.8 percent from the second quarter after the government enforced stricter rules for building permits in response to a 2005 scandal involving faked earthquake-engineering data.

The Bank of Japan last month cut its economic growth forecast for the year ending March 31 to 1.8 percent from 2.1 percent, in part because of the drop in construction.

Housing Starts

``Bottlenecks from kinks in the new building standards system have yet to be resolved,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. Lower housing construction may depress gross domestic product into the first quarter of next year, he said.

The Topix Construction Index of 103 companies has slumped more than a fifth in the past three months, making it the worst performer of the 33 groups in the broader Topix index, which slumped 11 percent in the same period. The fallout has spread to other industries as well.

Toto Ltd., a bathroom fixtures company, cut its full-year profit forecast by 25 percent last month after the rule change caused a drop in demand from customers outfitting new homes.

``It usually takes about three months for housing starts to affect us so we're starting to see the impact this quarter,'' said Kenji Matsumoto, spokesman at the Fukuoka-based company. ``The decline in starts has been so large that we had to revise our full-year forecasts.''

The GDP deflator, a broad gauge of prices, fell 0.3 percent, matching analysts' predictions.

To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net

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