Japan’s economy expanded at an annualized rate of 0.9% in the July-September quarter, according to government data, marking a significant slowdown from the revised 2.2% growth recorded in the previous quarter.

Tepid capital spending weighed on growth, but stronger-than-expected private consumption provided a silver lining.

Private consumption, which constitutes over half of Japan’s economic output, surged by 0.9%, far exceeding market expectations of 0.2% and improving from the 0.7% rise in the previous quarter.

Economist Kengo Tanahashi of Nomura Securities said the boost was partly attributed to temporary factors, such as a rebound in auto production after safety certification issues and temporary income tax cuts.

“The large increase in consumption was a big surprise,” Tanahashi noted, adding that this momentum supports the Bank of Japan’s (BOJ) projection of a recovery fueled by rising wages and robust consumption.

Capital spending, a critical driver of private demand, fell by 0.2%, matching economists’ forecasts. A slowdown in global economies, particularly in the US and China, dampened investment in sectors like chipmaking equipment.

Net external demand also acted as a drag, with exports minus imports shaving 0.4 percentage points off GDP growth, a deeper hit than the 0.1-point reduction in the previous quarter.

The latest GDP figures align with the BOJ’s assessment that Japan’s economy is on a path to recovery. The BOJ has maintained ultra-low interest rates but signaled readiness for further rate hikes if conditions improve, including inflation sustainably hitting its 2% target.

“The growth in GDP at around 0.9% is slightly above the potential growth rate,” said Tanahashi, suggesting room for cautious optimism.

Economy Minister Ryosei Akazawa acknowledged the positive trajectory but urged vigilance over potential risks. “We expect the economy to continue to recover due to better employment and wage conditions,” he said, citing concerns about external headwinds from overseas economies and market volatility.