Japan's economic growth may have slowed in Q3 as consumer spending, exports moderated, but cooling could be short-lived as service firms increase investment to meet improving domestic demand, survey finds

TOKYO , November 1, 2013 () – Japan's economic growth may have slowed in July-September as consumer spending and exports moderated, but growth will quickly bounce back as shoppers spend up before a sales tax hike next year, a Reuters survey found.

Capital expenditure was also expected to have slowed in the July-September period, the survey found. This cooling, however, could be temporary as service firms plan to ramp up investment to meet improving domestic demand.

A tighter labor market and signs of rising wages should also support consumer spending in coming quarters, which bodes well for Prime Minister Shinzo Abe's push to foster self-sustaining growth and end 15 years of mild deflation.

"This is more an adjustment in speed, because gains in consumer spending in the first half of the year were not sustainable," said Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute. "But there is no reason to expect consumption to weaken any further. Growth can quickly bounce back."

The median estimate from a Reuters poll of 25 economists saw Japan's economy growing 0.4 percent in July-September from the previous quarter.

That would be the second consecutive quarter that growth has slowed. The median estimate translates into an annualized increase of 1.6 percent. (The Cabinet Office will release the data on November 14 at 8:50 a.m. -- November 13 at 2350 GMT).

Private consumption, which makes up about 60 percent of the economy, was seen growing 0.1 percent, according to the poll, down from 0.7 percent growth in the previous quarter as falls in Japanese shares weighed on consumer sentiment.

Some individual investors also cut back on spending after a cashing in on a stock market rally earlier this year to buy luxury goods.

Other data, such as a rise in job availability to the highest in more than five years and rising wages in some industries, suggests consumer spending should pick up pace again.

The government will increase the sales tax in April to 8 percent from 5 percent, which is expected to encourage greater spending in October through December.

External demand is expected have taken 0.4 percentage point from growth over July-September, following a 0.2 percentage point contribution in the previous quarter, the poll showed.

Exports to Southeast Asia weakened as large capital outflows out of those countries slowed growth. However, economists expect Japan's exports to improve going into next year as overseas economies stabilize.

The Bank of Japan warned on Thursday that overseas economies are a little weaker than it expected, but the central bank raised its GDP forecast for next fiscal year as the government is planning a 5 trillion yen ($51 billion) stimulus package to offset the sales tax hike.

The BOJ has stood pat on monetary policy since it started radically expanding its quantitative easing in April, which is aimed at achieving a 2 percent inflation target.

Prime Minister Abe's plan is to combine fiscal spending and economic reforms with BOJ monetary easing to pull Japan out of a decades-long economic slump.

(Editing by Eric Meijer)

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