Japan Economy to Scrape Along after Hitting Bottom

Japan's economy shrank in the first quarter at its fastest pace since World War Two, the Ministry of Finance said on Thursday, supporting the view that the country will recover slowly from recession after hitting bottom in January-March.

AP

Japan's economy contracted a revised 3.8 percent in the first three months of this year, better than economists' median forecast for a 4.0 percent contraction, which was the same as the initial estimate. Capital expenditure and inventories fell at a slower pace than the government had initially estimated.

The economy is likely to grow only 0.5 percent from the second quarter, the first expansion in five quarters, as companies scale back some of last year's production cuts. Growth isn't likely to accelerate much further as overseas demand isn't strong enough to spur Japanese companies to increase capital expenditure, machinery orders data on Wednesday suggested.

Falling wages and a rising jobless rate will also weigh on growth in the coming months, economists say.

"Even if exports and manufacturers' production increase somewhat, it's hard to see that strength translating into domestic demand," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"As seen in the machinery orders data, a recovery in capital spending may be delayed. The economy may get some support from exports and public works spending in the near term. But after that support fades, the economy will remain sluggish."

The revised figure translates into an annualized contraction of 14.2 percent, against the previous reading of a 15.2 percent contraction and a median estimate for a 15.0 percent decline.

The dollar was little changed at 98.24 yen after the GDP data, while the euro was steady at 137.40 yen.

The Nikkei 225 Average later rose above the psychologically key 10,000 line for the first time in eight months as steel and bank shares gained.

Capital expenditure in the first quarter fell 8.9 percent, compared with a preliminary decline of 10.4 percent and a median estimate for a 9.1 percent fall.

Inventories subtracted 0.2 percentage point from growth, better than preliminary data showing inventories subtracted 0.3 percentage point.

Japan's core private-sector machinery orders unexpectedly fell for a second month in April, Wednesday's figures showed, suggesting firms are not confident that a bounce in industrial output and exports will be sustained enough to resume capital investment.

Economists also expect the jobless rate, which is already at a 5-1/2-year high of 5.0 percent, to rise further this year as companies are under pressure to cut costs.

"What is really missing is self-sustainability, because we are missing capital expenditure and missing employment," said Kyohei Morita, chief economist at Barclays Capital.

"Non-manufacturers are still suffering, which is translating into a weak household sector. Only manufacturers are enjoying a recovery. We expect a small double dip in the first quarter of next year, when Japanese and Chinese government stimulus run their course."

While the global financial crisis has dragged much of the rich world into recession, the contraction in Japan has been bigger than other major economies because of its dependence on exports of big ticket items such as cars and flat panel TVs.

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The euro zone economy shrank 2.5 percent in the same period while the United States contracted an annualized 5.7 percent.

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