Japan’s economy shrinks, adds to global concerns

Japan’s economy shrinks, adds to global concerns

Daniel Rook / AFP

Tokyo: Japan’s economy contracted in the second quarter of 2007 as firms cut spending on new factories and equipment, the government said Monday, 10 September, adding to jitters over the global economic climate.

The setback to Japan’s economic recovery, which comes just as the US economy shows signs of faltering, further reduced expectations of the Bank of Japan raising its super-low interest rates again any time soon.

Japan’s gross domestic product (GDP) shrank 0.3% in the three months to June from the previous quarter and by 1.2% annualised, the Cabinet Office said.

The figures were worse than an initial estimate of positive quarter-on-quarter growth of 0.1% for an annualised rate of 0.5%.

It was the first contraction in three quarters for Japan, which has been slowly recovering after falling into the economic doldrums in the early 1990s, but analysts were hopeful that the country can avoid another prolonged slump.

“We do not think the Japanese economy is on the brink of a fresh recession," Morgan Stanley economist Takehiro Sato wrote in a note to clients.

He said the fall in output followed two strong quarters and could also be partly due to data sampling problems with a capital spending survey.

Even so, sluggish personal consumption in July meant that the Japanese economy was unlikely rebound strongly in the quarter to September, he added.

Corporate capital spending, which had been the key growth driver of the world’s second-largest economy in recent years, marked its second straight quarterly decline in the three months to June, the GDP figures showed.

But the government said Japan’s economic recovery remained intact.

“I expect the trend of a sustained economic recovery to continue," said Finance Minister Fukushiro Nukaga, pointing to a gradual recovery in consumer demand and improved corporate profits.

Even so the weak report was seen as further cutting the chances of the Bank of Japan raising interest rates again in the near future.

“This contraction, combined with the worse-than-expected US jobs data, means that there’s no possibility of the Bank of Japan raising interest rates this month or next month," said BNP Paribas economist Yoshimasa Maruyama.

“There will probably be no rate hikes during this year or by the end of the fiscal year to March, given the condition of the US economy," Maruyama said.

BoJ governor Toshihiko Fukui has warned of the risk of keeping interest rates very low for too long, but the government argues it is too early to hike rates again with deflation lingering and financial markets in a fragile state.

Japanese share prices slumped 2.2% as the weak GDP figures added to concerns about the fallout from the US housing slump after Friday’s news of a surprise drop in US employment, the first in four years.

The fear is that if the US economy hits the skids, Japanese exports will be affected, putting the brakes on Asia’s largest economy.

The economy should return to positive growth in the third quarter of 2007 but the pace may be sluggish due to the weakness of the US economy, said Taro Saito, a senior economist at NLI Research Institute said.

“An export-led recovery may be difficult in the latter half of the year," he said.

Past GDP estimates were also revised, showing the economy shrank by 0.1% in the third quarter of 2006, despite the government’s official view that Japan is having its longest sustained economic recovery in post-war times.