Japan Post-Quake Rebound Wanes

Second-quarter GDP grows at annual pace of just 0.6% as consumer spending nears stall.

Japan’s reconstruction-fueled rebound waned in the second quarter as consumer spending growth almost stalled and export gains diminished, increasing the chance for monetary and fiscal stimulus.

Gross domestic product advanced an annualized 1.4 percent in the three months through June, less than the median estimate of 2.3 percent in a Bloomberg News survey of economists and down from 5.5 percent the previous quarter, a Cabinet Office report showed in Tokyo today. Unadjusted for prices, GDP contracted at a 0.6 percent annual pace.

Consumption rose the least since households cut spending in the immediate aftermath of the March 2011 earthquake, signaling a fading boost from government incentives that have supported domestic demand. With yen strength and Europe’s crisis curbing exports, today’s report escalates pressure on policy makers to head off a deeper slowdown in the world’s third-largest economy.

“Drafting a supplementary budget is already a done deal, as the Japanese economy can anticipate little support from overseas demand and the government has no other choice but to mobilize fiscal spending,” said Hiroshi Watanabe, a senior economist at SMBC Nikko Securities Inc. in Tokyo. “Political pressure on the Bank of Japan will probably intensify as deflation is expected to remain entrenched, just as today’s GDP deflator indicates.”

The GDP deflator, a measure of price trends across the economy, contracted 1.1 percent from the same quarter a year earlier, today’s report showed.

The yen traded at 78.24 as of 4:44 p.m. in Tokyo and the Nikkei 225 Stock Average fell 0.1 percent. Volume on the index was almost 41 percent below the 30-day average because of the O- bon holiday, a festival starting today during which many Japanese companies close for as long as a week.

From the previous quarter, GDP grew 0.3 percent. Quarter- on-quarter figures show consumer spending rose 0.1 percent in the April to June period, slower than a 1.2 percent advance in the previous three months. Net exports, or exports less imports, cut 0.1 percentage point from GDP.


Government Subsidies

Government incentives for households to purchase fuel- efficient cars have been supporting consumer spending, which accounts for more than half of the economy. Mizuho Securities Co. expects the program to expire this month, which may increase the nation’s reliance on overseas demand for growth. Prime Minister Yoshihiko Noda has also budgeted 19 trillion yen ($243 billion) for rebuilding from last year’s earthquake and tsunami.

The government is planning to compile a supplementary budget this autumn after reviewing today’s GDP report, Kyodo News said, without citing where it obtained the information.

Economists at Itochu Corp. and Mizuho Securities Research and Consulting Co. said the economy may contract in the fourth quarter as subsidies fade. BNP Paribas cut its GDP forecasts for the rest of the year, predicting an annualized 0.9 percent contraction in the July-September period and 0.1 percent growth in the final three months of 2012.

Today’s report indicated that household spending would have been weaker without the government incentives. Consumption of durable goods rose 3.1 percent in the second quarter, while semi-durable goods and non-durable goods fell and services increased 0.2 percent, the least since the first quarter of 2011, today’s report showed.

“Car sales supported gains in durable goods in the second quarter, but overall consumption was dull,” said Norio Miyagawa, a senior economist at Mizuho Securities Research in Tokyo. “Consumer spending may decline in the fourth quarter as the boosts from the government’s incentives will peter out by then.”

With the sales-tax increase passing the Diet last week, pressure may rise on policy makers to consider a supplementary budget and monetary stimulus to shore up domestic demand. Finance Minister Jun Azumi said last month the government would weigh whether more spending is necessary after examining today’s report.

In Europe later today, reports may show retail sales rose 2.5 percent in the Netherlands in June from a year earlier and increased 4.1 percent in Norway, according to surveys of economists by Bloomberg News. A report tomorrow will probably show the economy of the Euro zone shrank in the second quarter.

Slovakia’s consumer price index may have advanced 3.6 percent in July from a year earlier, the same pace as the previous month, a survey showed.

In Mexico, a report may show industrial production gained 3.4 percent in June from a year earlier and 1 percent from the previous month, a separate survey of economists showed.


Rising Yen

The yen’s advance against the dollar is also eroding the value of overseas earnings, with exporters such as Sony Corp. and Canon Inc. cutting profit forecasts in the past month.

Sony cut its full-year profit forecast on Aug. 2 after gains in the yen eroded overseas earnings and sales of consumer electronics weakened. Canon, the world’s largest camera maker, also last month cut its full-year profit forecast because of a stronger yen and expectations for weaker growth in the U.S., Europe and China. Sony and Canon get about 70 percent and 80 percent of sales revenue outside Japan, respectively.

The Bank of Japan refrained from easing policy at a board meeting last week. Central banks around the world have been supporting their economies as Europe’s woes deepen. The Philippines unexpectedly cut interest rates a third time this year to a record low on July 26, and the U.S. Federal Reserve said on Aug. 1 that it will pump fresh stimulus if necessary.

“The government and the BOJ can do something to mitigate the pressure on the economy, but I don’t think fiscal policy is really working apart from reconstruction spending,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG and a former central bank official. “There is more pressure on the Bank of Japan than the government to do something.”


Bloomberg News




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