Fears of a lull as economic growth wanes in Japan

Slower-than-expected growth underpins concerns the sluggish domestic spending and Europe's debt crisis are taking a toll on the world's third biggest economy.

PUBLISHED : Tuesday, 14 August, 2012, 12:00am
UPDATED : Tuesday, 14 August, 2012, 10:12am


Japan's economy expanded just 0.3 per cent in April-June, half the pace expected, fuelling concerns growth will continue to flag as a rebound in consumer spending starts to lose momentum and Europe's debt crisis weighs on global demand.

The data provides further evidence of a global slowdown raising expectations in financial markets that policymakers will take action to lift their economies.

The United States, Japan and China have all reported weaker growth in the April-June quarter compared with their previous-quarter figures.

Japan's growth undershot expectations for a rise in gross domestic product of 0.6 per cent and was sharply lower than an expansion in the previous quarter of 1.3 per cent - a revision from 1.2 per cent reported initially, the Cabinet Office said.

Financial markets showed a muted reaction to the data.

"As domestic demand is losing momentum and exports will likely weaken further due to Europe's debt trouble, there is a possibility that Japan will go back into an economic lull in July-September," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo.

The data highlights the Bank of Japan's growing concern that slowing exports will weigh on economic growth in the months ahead, which could set the stage for additional monetary policy easing in coming months.

"Europe's sovereign debt crisis remains a major risk to Japan and the global economy," said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"The Bank of Japan will likely take a wait-and-see stance but it could act again next month if financial turmoil and further monetary easing by the US Federal Reserve prompt a spike in the yen, threatening Japanese exporters' earnings and the economy's recovery prospects," Shikano added.

Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo, also said that the impact on growth of reconstruction work following last year's earthquake and tsunami was waning.

"There will still be public works spending for reconstruction from last year's earthquake, but the gains won't be as fast as they were in the first half of the year," Miyazaki said.

The world's third-largest economy grew at an annualised rate of 1.4 per cent, less than the median forecast of 2.5 per cent and slightly off the 1.5 per cent annualised pace of the United States in the same quarter.

The US economy expanded at a 2 per cent pace in the January-March quarter. China's economy grew 7.6 per cent in the second quarter from a year earlier, down from 8.1 per cent in the first quarter.

In Japan, growth in private consumption, which makes up about 60 per cent of the economy, slowed to just 0.1 per cent after expanding 1.2 per cent in the previous quarter. External demand shaved 0.1 of a percentage point off GDP in the second quarter and domestic demand contributed 0.4 points, the data showed.

Japan's economy is expected to outperform most of its G7 peers this year, helped by solid domestic demand, but analysts have slashed forecasts for factory output as the slowdown in the global economy becomes more pronounced.

A persistently strong yen is also a concern, because it can weigh on corporate earnings and lead some firms to delay capital expenditure.

Several exporters, including electronics giant Sony Corp and carmaker Nissan Motor Corp, said their April-June earnings took a hit from the strong yen. Nissan said the Japanese currency cut 25.7 billion yen (HK$2.55 billion) off its quarterly operating profit of 120.7 billion yen.

The currency has become a safe haven during the euro-zone debt crisis, but members of the government and the central bank worry that the strong yen will hurt business and consumer sentiment.

The Bank of Japan left monetary policy unchanged last week but lowered its assessment of exports and factory output.