Japan's economy returns to growth

The Japanese economy grew in the third quarter as it recovered from the effects of the earthquake and tsunami in March.

The Cabinet Office reported today that the Japanese economy grew 1.5 percent in the third quarter. This marks a return to growth in real gross domestic product following three consecutive quarters of declines.

Exports helped drive the return to growth in the third quarter. Exports grew strongly by 6.2 percent, recovering from a 5.0 percent decline in the second quarter following the disruptions to the economy caused by the earthquake and tsunami in March.

The growth in exports enabled net exports to contribute 0.4 percentage point to third quarter growth, its first positive contribution in five quarters.

Domestic demand also contributed to growth in the third quarter as it increased by 1.0 percent.

The strong growth in the third quarter was, to a large extent, a rebound from the effects of the earthquake though. Other recent economic indicators show that growth is likely to slow in subsequent quarters.

Last week, another report from the Cabinet Office showed that its index of leading economic indicators fell 2.2 points in September, its second consecutive monthly decline. The index of coincident economic indicators fell 1.4 points in September.

Also last week, the Economy Watchers Survey showed that the diffusion index for current conditions rose to 45.9 in October from 45.3 in September but that is still significantly below its recent peak of 52.6 in July. Meanwhile, the index for future conditions fell to 45.9 in October from 46.4 in September, its fourth consecutive decline.

Meanwhile, a strong yen and a weak European economy are factors that are likely to weigh on the Japanese economy. Also, another natural disaster, this time flooding in Thailand which is seriously disrupting economic activity there, could have an impact on Japanese companies that have manufacturing facilities there.

So while the Japanese economy has largely recovered from the disruptions of the earthquake, its growth outlook remains fragile.