Business | Economy
Japan economy shrinks more than forecast on high oil costs
Japan's economy shrank more than initially estimated in the second quarter to log its worst performance in seven years, as it struggled with high raw material costs, slowing exports and weak capital spending.
- Reuters
- Published: 22:59 September 12, 2008
Tokyo: Japan's economy shrank more than initially estimated in the second quarter to log its worst performance in seven years, as it struggled with high raw material costs, slowing exports and weak capital spending.
The economy is expected to return to positive growth in July-September but any recovery looks set to be feeble, while some analysts say a further contraction cannot be ruled out.
"The spike in oil prices dealt the main blow in the April-June quarter," said Masayuki Kichikawa, chief Japan economist at Merrill Lynch.
"The shock will gradually ease. The improvement may not show much in July-September figures but will be felt in October-December," he said.
The economy contracted 0.7 per cent in April-June, slightly more than the government's preliminary figure of a 0.6 per cent decrease. But it was not as bad as economists' median forecast of a 0.8 per cent fall.
The 0.7 per cent contraction translates into an annualised drop of three per cent.
The revision was mainly due to a sharper fall in capital spending, which was cut to a fall of 0.5 per cent from an initial estimate of a 0.2 per cent decline.
Uncertain outlook
"Companies are reluctant to spend to expand capacity given the uncertain outlook for demand both at home and abroad," said Maiko Noguchi, senior economist at Daiwa Securities SMBC.
Exports - a major engine of the economy - were also down 2.5 per cent, more than the preliminary reading of a 2.3 per cent decrease.
Net exports were a negative contributor to growth for the first time in more than two years, cutting overall growth by 0.1 per cent point.
Financial markets did not react much to the revised GDP data, which did little to alter the dominant view that the Bank of Japan will keep interest rates steady at 0.5 per cent until late next year.
Separately, Japan's industrial production was revised up to a rise of 1.3 per cent in July from a month earlier, compared with a 0.9 per cent increase in a preliminary reading.
But any growth for the current quarter is expected to be weak.
"We expect modest GDP growth of around 0.3 per cent in July-September," said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute.
Moderate recession
"But as a trend, the moderate recession will continue and we will probably see more weak indicators in the second half of this year," he said.
The Japanese government defines a recession as starting from the point at which growth begins slowing.
But some also say that given the wobbly state of world economic health, Japan's economy may contract for a second consecutive quarter, which would meet the more standard definition of a recession.
Worries about the global economy include a slowdown in the euro zone, whose economy also shrunk in the second quarter, as well as continued ructions in the US financial sector and signs of strains in emerging economies after years of bustling growth.
The Bank of Japan has said the country's economy will eventually return to a moderate growth path, even as it last month delivered the bleakest economic assessment in a decade.
No policy change is expected when the central bank's policy board meets for a two-day meeting from Tuesday.
Derivative contracts are hardly pricing in any policy changes in the coming 12 months.
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