Japan Economy Slows More Than Expected in Second Quarter

Japan Economy Slows More Than Expected in Second Quarter

Published: Sunday, 12 Aug 2012 | 10:00 PM ET Text Size 

By: Reuters with CNBC.com

http://www.cnbc.com/id/48641926

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Japan's economy expanded just 0.3 percent 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 percent and was sharply lower than an expansion in the previous quarter of 1.3 percent, a revision from 1.2 percent 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 easing in coming months.

"Europe's sovereign debt crisis remains a major risk to Japan and the global economy," said Tatsushi Shikano, 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 U.S. Federal Reserve prompt a spike in the yen, threatening Japanese exporters' earnings and the economy's recovery prospects," Shikano said.  

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

is 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 annualized rate of 1.4 percent, less that the median forecast of 2.5 percent and slightly off the 1.5 percent annualized pace of the United States in the same quarter. The U.S. economy had expanded at a 2.0 percent pace in the January-March quarter.    

China's economy grew in the second quarter 7.6 percent from a year earlier, down from 8.1 percent in the first quarter.    

"Japan's economy continues in an uptrend led by domestic demand," Economics Minister Motohisa Furukawa said in a statement issued after the data release.

Growth in private consumption, which makes up about 60 percent of the economy, slowed to just 0.1 percent after expanding 1.2 percent in the previous quarter. The reading was also below a median estimate of 0.3 percent.    

External demand shaved 0.1 percentage point off GDP in the second quarter, while domestic demand contributed 0.4 point, 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.

Several exporters blamed the strength of the yen as weighing on their April-June earnings, including electronics giant Sony and carmaker Nissan Motor.

Nissan posted operating profit of 120.7 billion yen, but said the yen's strength had reduced that by 25.7 billion yen.

The currency has become a safe haven during the euro zone debt crisis, but its rise has weighed on exporters' earnings power.

The Bank of Japan left monetary policy unchanged last week but lowered its assessment of exports and factory output, a sign it is ready to ease policy further if Japan's recovery prospects are threatened.