Japan's third quarter GDP might be better than expected

The capital spending index out this week surprised on the upside. On the YoY basis, capital expenditures surged 11.2% in 3Q, far better than the -0.3% decline seen in private non-residential investment in the preliminary GDP data. This suggests a good chance that the 3Q GDP will be revised upward when the final estimate is released next week. Growth may be revised to 0.5% (QoQ saar), in contrast with the -0.8% contraction reported initially. This also means the economy may have avoided a technical recession, marginally. 

Having said that, a better-than-expected 3Q GDP may not alter the fact that the output gap has fallen negative. The external demand outlook remains lackluster due to the headwinds from China's slowdown and Fed's tightening. The boosting impact of Abenomics on domestic business sentiment has also started to dissipate. In absence of a strong recovery, the risks remain that wage growth will lose momentum and inflation expectations will decline, which will put pressures on the BOJ to further ease monetary policy at some point next year.