Tokyo: Japan’s economy returned to growth in the second quarter, ending its longest recession since World War II, but analysts warned of a rocky road ahead as the nascent recovery was based on short-term stimulus efforts around the world.
Growth in the world’s No.2 economy is likely to continue in coming quarters as companies restock inventories due to exports and government stimulus spending around the world, providing further evidence that the worst of the damage wrought by a global financial crisis may be over.
But economists and policymakers were wary about the outlook for next year because exports, the biggest contributor to growth in April-June, may slow as stimulus measures in other countries wear off.
A deteriorating jobs market is also likely to undermine Japanese consumer spending after government subsidies on energy-efficient cars and home appliances expire. This could delay a recovery in capital expenditure, economists say.
“Today’s data was driven by stimulus steps in Japan and overseas, so Japan’s economy is far from self-sustaining growth,” said Kyohei Morita, chief economist for Japan at Barclays Capital.
“The growth level for the July-September quarter will likely be similar to that of April-June, and the pace of growth is expected to slow down thereafter as the effects of government stimulus run their course.
Gross domestic product grew 0.9% in April-June, slightly short of a median market forecast of a 1% increase. That puts Japan in the first camp of G-7 countries that have pulled out of recession, along with Germany and France.
That compared with a 0.3% contraction in the United States in the same quarter. The euro zone economy shrank 0.1% after a 2.5% fall in the first three months.
Japan’s economy expanded for the first time in five quarters, following a revised 3.1% contraction in January-March and a 3.5% decrease in the final quarter of 2008 - the biggest drop on record.
On an annualised basis, Japan’s economy grew 3.7% from the first quarter, the fastest since January-March 2008.
Inventories cut 0.5 percentage point from Japan’s GDP in April-June, more than double a 0.2 percentage-point deficit the previous quarter. This suggests inventories will contribute to growth in the July-September quarter as companies stockpile goods to meet a pick-up in demand at home and abroad, economists say.
But the rise in output isn’t likely to translate into higher corporate spending as manufacturers are still operating at around 70% of capacity, economists say.
Capital expenditure in April-June marked five consecutive quarters of contraction, the longest such streak since 1976.
“In addition to exports and consumption, inventories are also likely to be a positive factor next quarter,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute.
“However, capital expenditure hasn’t staged a great recovery, and this could be a problem for the economy.”
The April-June data also showed that the domestic demand deflator, an indicator of price trends, fell 1.7% from the same period a year earlier, faster than a 1.0% annual decline in the previous quarter as deflationary pressures mount.
Given the lack of recovery in capital expenditure and the doubts about consumption, the Bank of Japan is likely to keep interest rates at an ultra-low 0.1%, according to Morita of Barclays Capital.
“Conditions are still severe but Japan’s economy is expected to pick up,” Japanese Economics Minister Yoshimasa Hayashi told reporters on Monday after the data.
Analysts said it was unclear if the GDP figures would give political ammunition to Prime Minister Taro Aso’s ruling party, which polls show faces defeat in a general election on 30 August.
Economists expect Japanese GDP to grow 0.4% in July-September from the previous quarter, followed by a 0.5% increase in October-December, a Reuters poll showed.
But they say the recovery could lose momentum later this year as a temporary boost from government stimulus steps peters out.
The yen initially slipped and JGB futures edged up shortly after the GDP release, but the data had little sustained impact.
External demand, the balance of exports and imports, added 1.6 percentage points to April-June GDP due in part to China’s $585 billion stimulus package and other such spending rolled out by governments around the world to combat the global recession.
Tokyo’s stimulus steps helped private consumption, which accounts for about 60% of the economy, to rise 0.8% and public investment to increase 8.1%.
Capital spending fell 4.3%, smaller than a 5.9% drop expected by economists but marking the fifth straight quarter of slump as companies remain cautious about the outlook for global final demand.