Japan's economic growth accelerated in the third quarter as expiring government incentives gave consumption a last-minute boost before a long-anticipated slowdown that analysts say is already under way.
Indeed, many expect the economy to stall or even contract slightly in the next two quarters as the strong yen's damage to exports becomes more evident and factory output slumps after incentives for buyers of low-emission cars expired in September.
While few expect Japan to slip back into recession, policymakers remain alert to risks to the fragile economy.
The yen was trading below its 15-year peaks on Monday, but its renewed climb toward record highs could prompt the Bank of Japan to ease monetary policy further by spending more on government bonds and other assets to avoid a prolonged downturn.
"Third-quarter growth relied heavily on domestic demand, and this suggests a marked slowdown in the final quarter as stimulus-driven consumption loses steam and export growth slows," said Junko Nishioka, chief Japan economist at RBS Securities.
Japan's gross domestic product grew 0.9% in July-September from the previous quarter, accelerating from a 0.4% rise in the second quarter and beating a median forecast for a 0.6% rise, official data showed on Monday.
The fourth straight quarter of growth translates into an annualised rise of 3.9%, nearly double the rate of U.S. growth in the same period.
OUTLOOK THREATENED
The government saw little to cheer about, with Economics Minister Banri Kaieda warning that slowing overseas growth and the strong yen could threaten the outlook.
"Japan's economy is at a standstill with weakness in production," he said in a statement issued after the data.
Japan emerged from its worst recession since World War Two in the second quarter of 2009, but growth has been spotty due to a lacklustre labour market and slow gains in corporate spending.
A Reuters poll showed the economy is expected to shrink 0.1% in October-December as the effects of government stimulus fade, before resuming a moderate recovery.
Underscoring the pain inflicted by the strong yen and slowing exports, net external demand — or exports minus imports — made no contribution to third-quarter GDP after adding 0.3 percentage point in April-June.
Private consumption, which accounts for about 60% of the economy, rose 1.1%, the biggest increase in more than a year, due to the one-off boost from expiring car incentives and a tobacco tax hike in October that spurred a last-minute buying binge.
Automakers have already been slashing output in anticipation of a slump in demand after the stimulus expired. Capacity utilisation fell 1.1% in September from a month earlier to log the fourth straight month of declines, data showed on Monday.
The government is hoping to pass through the powerful lower house of parliament on Monday a 5 trln-yen ($61 bln) extra budget but analysts doubt that the modest package will give much of a boost to the $5 trln economy.
That leaves the onus on the BOJ, although it feels less pressure to ease now with the yen having weakened somewhat after its ascent near record-high levels last month.
"The yen has fallen a bit but you can't disregard the risks of further yen rises due to U.S. monetary easing," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"That will add pressure on the Bank of Japan to ease policy further as there's limited room for the government to boost fiscal spending."
The BOJ last eased its policy early in October by pledging to keep rates effectively pegged at zero until the end of deflation was in sight and announcing a plan to spend 5 trln yen on assets ranging from government bonds to corporate debt.
The central bank has said it stands ready to boost the size of the asset buying fund, if economic conditions deteriorate.
