(RTTNews) - Despite official data showing that the Japanese economy expanded at its fastest pace in more than two years in the third quarter, BNP Paribas commented that it does not signify the start of an autonomous recovery, and that the Japanese economy continues to operate at an extremely low level.

Japan's GDP grew 1.2% sequentially in the third quarter, sharply higher than the revised 0.7% increase in the previous quarter. Economists had expected a more moderate 0.7% growth. On an annualized basis, real gross domestic product surged 4.8% - again shattering expectations for a 2.9% increase, and faster than the revised 2.7% gain in the second quarter.

BNP Paribas noted that the surge in GDP was driven by the stronger-than-expected contribution from private inventories, recovering exports, the continued recovery of private consumption, and capital investment rebounding for the first time in six quarters.

The firm said that the upside surprise in third quarter's GDP results had more to do with favorable temporary effects rather than signaling at a genuinely sustainable recovery. The firm pointed out that the revival in private consumption was largely due to fiscal stimulus, while the rebound in capital spending was a result of pent-up demand following the subsiding of excessive corporate pessimism. BNP Paribas also noted that deflationary pressures continued to remain strong, saying that deflationary expectations appear to be becoming "entrenched".
Moreover, the firm doubted the sustainability of the brisk recovery in Japanese exports, saying that the upsurge was driven by highly stimulative conditions among Japan's Asian trade partners coupled with dollar-buying foreign exchange intervention to stem local currency appreciation from capital inflows linked to escalating carry trades. Furthermore, the positive effects of the inventory cycle and the fiscal stimulus will fade out in the coming quarters.

"For autonomous growth, corporate earnings must recover and that must spread to household incomes," BNP Paribas said. "This mechanism is unlikely to kick in anytime soon as worker compensations seem set to continue falling."

In all, the firm expects the Japanese economy to lose momentum in the coming quarters, and enter a "soft patch" in the first-half of 2010.

by RTT Staff Writer

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