Analysts already expect the economy to shrink in the current quarter due to the sales tax hike
Japan's economy expanded at a much faster pace than initially reported in the third quarter, as resilient domestic demand and business spending offset the hit to growth from falling exports and global trade tensions.
Gross domestic product grew an annualised 1.8% in July-September, stronger than the preliminary reading of 0.2% annualised growth, Cabinet Office data showed Monday.
The firmer growth marked the fourth consecutive quarter of expansion and also beat economists' median forecast for a 0.7% gain. It was mostly driven by improvements in capital expenditure and private consumption.
However, analysts say the third quarter strength, which was the weakest growth seen this year, masks some fragility that could to lead to a much weaker performance going forward.
"While Japan's economy expanded more rapidly ahead of October's sales tax hike than initially estimated, output is set to shrink in 2020," said Marcel Thieliant, senior Japan economist at Capital Economics.
"The main reason for the upward revision was that non-residential investment jumped by 1.8% on-quarter instead of the preliminary estimate of 0.9%," he wrote in a note.
Behind the big headline increase was strong investment from non-manufacturers, such as retailers, said Takeshi Minami, chief economist at Norinchukin Research Institute.
"In contrast to that, spending by manufacturers wasn't so strong."
The jump in capital spending outpaced the median forecast for a 1.7% increase.
The annualised GDP growth translates into quarter-on-quarter expansion of 0.4% from April-June, compared with a stronger 0.5% gain in the second quarter and a preliminary reading of a 0.1% increase.
The better-than-expected GDP revision comes after exports and factory output posted their largest declines in years in October, exposing widening cracks in an economy hurt by declining demand.
The Bank of Japan could offer a bleaker assessment on factory output than in October at its rate review this month, sources with direct knowledge of the matter said.
Private consumption, which accounts for some 60% of gross domestic product, rose 0.5% from the previous three months, slightly better than the preliminary reading for a 0.4% gain, the data showed.
Some analysts are worried that the jump in business and household spending before October's sales tax rise bodes ill for demand in the months ahead, threatening to leave the economy without a growth driver unless exports rebound.
A gloomy set of data, including worse-than-expected October household spending and retail sales figures, suggests the hit to consumption from the sales tax hike may be larger than previously thought.
Analysts already expect the economy to shrink in the current quarter due to the sales tax hike.
"The figures on consumption that were released on Friday were weak," said Minami at Norinchukin Research Institute.
"The economy will likely not be able to avoid contraction in the fourth quarter."
Japan's cabinet approved a $122 billion fiscal package last week to support stalling growth amid the outlook risks and as policymakers look to sustain economic activity beyond the 2020 Tokyo Olympics.
Net exports - or exports minus imports - subtracted 0.2 percentage point from revised GDP growth, while domestic demand added 0.6 percentage point.