Japan’s 3.7 percent economic expansion last quarter ended the country’s worst postwar recession. The bounce may be as good as it gets.
Growth will slow to an annual 2.9 percent pace in the three months ending Sept. 30, according to the median forecast of 10 economists surveyed after yesterday’s gross domestic product report. Falling business investment and rising unemployment may hamper a recovery that has been fueled by $2.2 trillion in emergency spending by governments worldwide.
Companies including Nikon Corp. and NEC Electronics Corp. are cutting costs and firing workers to narrow losses. Japanese will head to the polls for a general election on Aug. 30 against a backdrop of unemployment approaching a record high and a public debt that’s almost twice the size of the economy.
“We have our doubts about the durability of this,” said Robert Feldman, head of economic research at Morgan Stanley in Tokyo. “There’s isn’t enough demand to get us back on a very strong recovery path. We don’t see a huge downside, but nevertheless the upside is pretty limited.”
The Nikkei 225 Stock Average plunged the most in four months yesterday on concern growth will falter once the effects of government stimulus packages start to fade. Japan joins France and Germany in being the first Group of Seven economies to climb out of the global recession.
Polls show Prime Minister Taro Aso’s ruling Liberal Democratic Party is likely to lose the lower house election to the opposition Democratic Party of Japan, which has never held power before. The DPJ would inherit an economy that after last quarter’s expansion is still at its 2004 size.
‘Temporary Factors’
“We’ve only recouped about a tenth of what we lost in the last year and what’s driving the recovery at the moment is essentially temporary factors,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo.
Economists surveyed last month said growth will slow in each of the next three quarters and come to a near standstill in the three months to June 2010.
Japan’s first expansion in five quarters was driven by exports that jumped 6.6 percent, led by demand from China, yesterday’s report showed. At home, Aso’s 25 trillion yen ($264 billion) in stimulus helped consumer spending rise 0.8 percent and government investment climb 8.1 percent.
The sustainability of Japan’s recovery hinges largely on its overseas markets. A report last week showed confidence among U.S. consumers unexpectedly fell in August on concern over jobs and wages.
Half the Pace
Bank of Japan Governor Masaaki Shirakawa said last week that demand for the country’s products and services may not gain momentum. The central bank estimates Japan’s potential growth rate has fallen to about 1 percent, about half the pace achieved during the country’s six-year expansion through 2007.
“It’s very simple: domestic demand is very, very weak and that’s about 70 percent of the economy,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. “Once the fiscal stimulus fades, the underlying trend will emerge, which is basically weak income and weak consumption.”
A lack of demand is already weighing on prices, sparking concern that deflation may once again become entrenched in the economy. Consumer prices plunged a record 1.7 percent in June and yesterday’s GDP report showed wages fell a record 4.7 percent from a year earlier.
“It’s going to be very hard to shake off the deflation,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “You don’t want to be too much of a spoilsport when there’s quite good headline growth numbers, but at the same time you can’t really ignore that prices are falling.”
Being Cautious
Businesses are also being cautious. Capital spending, which accounts for about 15 percent of the economy, fell 4.3 percent last quarter. A survey published this month by the Development Bank of Japan showed companies will cut fixed investment 9.2 percent this fiscal year. Reductions by manufacturers will be the steepest since 1993.
Nikon, which is cutting 1,000 jobs, this month forecast a record 28 billion yen annual loss as customers scale back orders for semiconductor equipment. NEC Electronics is predicting its fifth straight year of losses and eliminating 1,200 jobs.
Spending by companies “is likely to remain weak for at least another year,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. “A robust V- shaped recovery remains unlikely.”
By Jason Clenfield and Tatsuo Ito
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