Japan revises Q3 GDP higher, keeps alive BOJ rate-hike expectations

Japan's economy expanded in July-September at a faster pace than initially reported thanks to upward revisions in capital investment and exports, keeping alive market expectations for a near-term interest rate hike by the central bank.

But a downward revision on consumption underscores the fragile nature of the economic recovery, and leaves uncertainty on how soon the central bank could raise interest rates again, with a December hike not guaranteed either, some analysts say.

The data will be among factors the BOJ will scrutinise at its next policy meeting on Dec. 18-19, when some analysts expect a hike in short-term interest rates from the current 0.25%.

"It does support the case for a December rate hike, though the weakness in consumption is a concern," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Gross domestic product (GDP) rose an annualised 1.2% in the three months to September, the Cabinet Office's revised data showed on Monday, higher than economists' median forecast and the initial estimate of 0.9% growth.

The revised numbers translate into a quarter-on-quarter expansion of 0.3% in price-adjusted terms, compared with a 0.2% growth in preliminary data released on Nov. 15.

The upgrade was caused in part by a smaller-than-expected decline in capital expenditure, which fell 0.1% in the third quarter compared with a preliminary reading of a 0.2% drop. It compared with economists' estimate for a 0.1% rise.

External demand, or exports minus imports, knocked 0.2 percentage point off growth, less than a 0.4 point drop in the preliminary reading, the revised GDP data showed.

Private consumption, which accounts for more than half of the Japanese economy, rose 0.7%, less than the preliminary reading of 0.9% growth.

"While the data isn't something that gives a huge boost to rate hike expectations, it won't be a hindrance to raising rates either," said Uichiro Nozaki, an economist at Nomura Securities.

The upward revision still leaves third-quarter GDP growth much slower than an annualised 2.2% expansion in the April-June period, which was largely in reaction to a contraction in the first quarter caused by output disruptions in some auto plants.

The BOJ phased out a decade-long, radical stimulus in March and raised short-term interest rates to 0.25% in July on the view Japan was progressing towards sustainably achieving its 2% inflation target.

Governor Kazuo Ueda has signalled readiness to raise rates again if the BOJ becomes more convinced that inflation will durably stay around 2% backed by rising wages and robust domestic demand.

Nozaki at Nomura Securities expects consumption to have slowed in the current quarter, but to rebound in the January-March quarter on prospects of firm wage growth.

But others are less optimistic about Japan's economy with overseas uncertainties, such as threats of higher tariffs by U.S. President-elect Donald Trump, clouding the outlook.

"While improvements in real wages will underpin consumption, the recovery in external demand will be muted as overseas growth stagnates," said Masato Koike, senior economist at Sompo Institute Plus.

"Japan's economy will continue recovering but the pace will be modest," he added.

Many market players expect the BOJ to hike rates again by the March end of the current fiscal year, though they are divided on whether it would come in December or early next year.

The BOJ is staying guarded on the timing of the next rate hike with December hardly a done deal given soft consumption, its governor's cautious decision-making style and anxiety over U.S. economic policy in a second Trump presidency, sources have told Reuters.