The figure comfortably outstrips consensus forecasts of 0.8% and has been seen as lowering the chances of further Bank of Japan stimulus measures being launched.
The latest data represents the third quarter in a row that growth has been achieved, in large part due to the improving strength of Japan’s exports.
“External demand has been a key contributor to growth during the quarter with exports up 2.0% year on year,” said lead strategist at SuMi TRUST Katsunori Kitakura. “The BOJ’s decision to not lower interest rates further into negative territory, combined with speculation over a Fed rate hike in December, saw exports rise during July to September, as any appreciation of the yen was halted."
As has long been the case, Japan’s economy will in large part continue to depend on export numbers Kitakura noted. “For the remainder of the year, exporters will continue to be the key growth driver. Trump’s policies are likely to be inflationary and should accelerate the rise in interest rates. As a result, the yen will weaken against a stronger dollar, and will provide an improved earnings outlook for this sector.”
“While initial GDP releases are typically subject to revisions, this stronger growth confirms what we’ve been hearing anecdotally from managers and their company meetings that the picture in Japan is improving,” added Nathan Sweeney, senior investment manager at Architas. This reduces the pressure on the Bank of Japan to increase monetary easing.”
“However, while a rise in exports was the main driver of the strong growth, there was a corresponding fall in imports which is consistent with sluggish domestic demand and highlights the major challenge still facing the economy, namely low consumption and falling prices,” Sweeney continued. “The Japanese economy has been picking up under Prime Minister Abe and one of the arrows of Abenomics is targeting the workforce with labour reforms, but today this seems to be one of the key obstacles to Japan’s recovery and more work will need to be done.”