It News: Japan GDP Points to Shaky Recovery

August 13, 2012

Japan GDP Points to Shaky Recovery

By TAKASHI NAKAMICHI
August 13, 2012
TOKYO—The Japanese economy slowed more sharply than expected in the April-June quarter as exports and consumer spending lost steam, raising the specter of further deceleration for the rest of this year.

Japan had stellar growth in the first quarter on stepped-up government spending on rebuilding in areas battered by the March 2011 earthquake and incentives to boost sales of fuel-efficient vehicles.

But fiscal policy appears no longer enough to offset the growing impact of Europe's persistent debt crisis and the resulting global slowdown on Japan's export-reliant economy.

"Support from fiscal policy is expected to gradually decrease from now on," said Ryutaro Kono, chief economist at BNP Paribas. "At the same time, any rapid recovery in the world economy is difficult to expect, making it very likely for exports to remain sluggish for a while. We expect the pace of recovery to slow in the second half of this year."

Japan's gross domestic product grew at a price-adjusted annualized pace of 1.4% in the April-June quarter after the previous quarter's revised 5.5% expansion, according to data released Monday by the Cabinet Office. It was slightly below the U.S.'s second-quarter growth rate.

All the second-quarter growth came from domestic demand components, such as private and government spending and business investment. International trade shaved 0.3 percentage point off overall growth.

The data add to signs that a fallout from Europe's turmoil is taking a rising toll on economies across the world. Although few foresee any Japanese recession for now, the findings may put additional pressure on the already hard-pressed government and central bank to do more to bolster the recovery. Solid growth is considered essential for the nation's policy priority of raising taxes to mend its battered public finances.

"We need to be on alert to a further deterioration in overseas economies amid Europe's sovereign debt crisis," said economy minister Motohisa Furukawa after the release of the data.

BNP Paribas's Mr. Kono expects Japan's economy to contract a real annualized 0.9% in July-September followed by a 0.1% increase in October-December. Any shrinkage would mark the first since April-June 2011.

Barclays Capital has cut its third-quarter growth projection to a real annualized 1.2% from the previous 1.8%.

"The main factors behind this downward revision are a slower-than-expected deployment of post-earthquake reconstruction demand and a cut to our forecast for exports on downward revisions to the outlook for China," said Kyohei Morita, Barclays's chief Japan economist.

Public investment, including infrastructure projects, was up an annualized 7.2% in the second quarter. But the gain was less than half that of the quarter.

Gains in exports of goods and services slowed to 4.8%, roughly a third of that of the previous quarter.

In another troubling sign, consumer spending, the largest component of Japan's GDP, expanded an annualized 0.6% in April through June, the weakest in five quarters.

"Private consumption is a concern as the government policies that have stimulated it, particularly subsidies for fuel-efficient vehicles, are peeled back," said Jun Kawakami, market economist at Mizuho Securities. "That could really weigh on domestic demand."

This one-off measure helped spark an unusually strong 5.0% rise in consumption in the first quarter but is now expected to expire in August.

Annualized GDP growth could sink below 1% in October-December when the impact of lower car sales would be at its maximum, said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute.