Japan's economy shrinks in second quarter

August 13, 2008 6:46:26 AM PDT
FIRST PARAGRAPHJapan's gross domestic product, or the total value of the nation's goods and services, dropped at an annual pace of 2.4 percent in the April-June period, a marked downturn from a 4.0 percent rise registered in the January-March period.

The new numbers - the first negative reading in four quarters - bolstered growing evidence that Japan's six-year expansion was over.

On a quarterly basis, GDP contracted 0.6 percent, after a 0.8 percent increase in the January-March period, the Cabinet Office said. Private consumption, which accounts for more than half of inflation-adjusted GDP, dropped 0.5 percent from the previous quarter. Housing investment was down 3.4 percent.

Two main drivers of Japan's six-year economic recovery - business investment and exports - also deteriorated. Corporate capital investment in factories and equipment fell 0.2 percent from the previous quarter, while overall exports of goods and services slid 2.3 percent.

The latest figures, which had been widely expected, followed a series of sluggish economic indicators.

The government's monthly economic report for August released last week described the economy as "weakening." Although the Cabinet Office refrained from using the term "recession," it left out any reference to an economic "recovery" for the first time in more than six years.

Industrial production was down 2.2 percent in June from the previous month, and slowing demand overseas is battering Japanese exporters.

The country's top automaker, Toyota Motor Corp., said last week its fiscal first-quarter profit plummeted 28 percent, and the automaker stuck to its forecast that full-year profit will fall for the first time in seven years as it faces more problems from a weakening North American market and rising material costs.

Domestically, rising inflation is sapping consumer sentiment, with July's consumer confidence index falling to its lowest level since the government began tracking the data in 1982.

While many economists are already referring to the downturn as a recession, they also note that the contraction is likely to be shallow and short-lived.

Merrill Lynch economists Takuji Okubo and Masayuki Kichikawa said in a GDP preview report Monday that sound economic fundamentals, easing commodities prices and continued strength in Asian export markets should help Japan weather the current turbulence.

"Within Japan, there are little excesses in employment, capacity and corporate leverage," they write. "We do not see elements in the economy that would push the Japanese economy into a deeper recession."

Still, Japanese officials are worried.

The government on Monday released a draft framework of an emergency economic stimulus package designed to help the country cope with high fuel and commodity prices. Measures include financial assistance for small and midsize companies, subsidies for industry to improve energy efficiency and highway toll discounts.

It did not provide further details, including the scale and total value, or how the government planned to finance the package amid its larger goal of cutting spending.

More certain are the Bank of Japan's plans, which many economists agree are likely to factor in the slowing economy more so than rising inflation. When the central bank policy board meets next week, it is expected to keep its key interest rate unchanged at 0.5 percent.