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The Japanese economy grew at an annualised pace of 1.4 per cent in the third quarter of 2017 as the country recorded its longest run of unbroken expansion since 2001.

It was the seventh consecutive quarter of growth, and while the pace of expansion was slower than in the second quarter, it was well above Japan’s long-run trend of about 0.5 per cent.

That suggests Prime Minister Shinzo Abe’s economic policies are still on track to create inflation eventually as the economy runs out of spare capacity.

“Household incomes continue to grow at a solid pace and external demand is holding up,” said Marcel Thieliant, senior Japan economist at Capital Economics in Singapore. “However, the economy is running into capacity constraints which suggests that growth will start to slow next year.”

The composition of demand was unexpectedly weak, however. Consumption subtracted a full percentage point from growth, showing that expansion under Mr Abe has still not turned into higher household spending.

Business investment was also modest, contributing only 0.2 percentage points to growth, while public investment subtracted 0.5 percentage points from the total.

The quarter was rescued by trade and inventory building. Net exports contributed a full two percentage points to annualised growth, as the weakness of the yen boosted sales overseas, while sluggish demand at home held down exports.

The question now turns to what Shinzo Abe chooses to make his legacy © Reuters

Inventory building contributed 1 percentage point to growth. That implies a weaker economy than the headline figures suggest because inventory build-ups are temporary and may reverse in a future quarter.

After winning re-election last month, Mr Abe has vowed to redouble his effort to boost Japan’s economy and escape from two decades of on-and-off deflation. The pace of price rises is still close to zero.

Mr Abe has called on companies to raise wages 3 per cent in next year’s annual wage round in order to boost consumer spending power.

Debate has also begun on how to offset a rise in consumption tax from 8 to 10 per cent — scheduled for autumn 2019 — with an offsetting spending stimulus. A similar tax rise in 2014 hammered the economy and caused a technical recession.

Japan’s gross domestic product data are notoriously volatile and the initial estimate of GDP has to be treated with particular caution because it is based on limited source data. Large revisions are common with the second estimate, which is due on December 8.

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