Japan’s Economy Shows Signs of Improvement

Japan’s Economy Shows Signs of Improvement
By HIROKO TABUCHI
Copyright by The New York Times
Published: August 16, 2009
http://www.nytimes.com/2009/08/17/business/global/17econ.html?th&emc=th


TOKYO — Japan’s economy rebounded in the latest quarter for the first time in a year, signaling the possible end of the country’s deepest recession since World War II and brightening prospects for a widespread global recovery.
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Japan’s economy, the world’s second-largest, plunged into recession in the wake of the global financial crisis last year. Exports, its mainstay, at one point fell to half their precrisis levels.

But a turnaround in exports and a vast fiscal stimulus program helped produce a 0.9 percent economic expansion in the three months that ended June 30, government figures showed on Monday, equivalent to annualized growth of 3.7 percent.

The expansion was in line with the 0.9 percent growth forecast that was the average of 10 economists surveyed last week. A 1.2 percent growth in public demand helped offset a 1.3 percent fall in demand from the private sector, the data showed. Overall domestic demand fell 0.7 percent from the previous quarter.

“The results were very positive,” said Takuji Aida, senior economist at UBS Securities Japan. “It’s true Japan would not have achieved growth without government stimulus. Still, the data shows that inventory adjustment is all but over, and we can expect growth going forward.”

The Japanese economy’s resurgence after four consecutive quarters of contraction — including an 11.7 percent fall in annualized terms in the previous quarter — adds to a slowly improving picture of the world economy. (The growth rate for the previous quarter was revised upward Monday from 14.2 percent.)

Last week, the German and French economies showed unexpected growth. The Federal Reserve said last week that the United States, the world’s biggest economy, appeared to be “leveling out.” China, Hong Kong, Singapore and South Korea have reported rebounds as the effects of stimulus efforts across the globe take effect.

Recovery in these critical overseas markets whittled down inventories and released some pent-up demand, bolstering Japan’s exports of cars and electronics. Exports grew 6.3 percent from the previous quarter, while imports fell 5.1 percent.

At home, new tax breaks and incentives to help sales of energy-efficient cars and household appliances, coupled with lower gas prices and a rebound in share prices, spurred consumer spending. Prime Minister Taro Aso has pledged 25 trillion yen (about $263 billion) in stimulus money, including a cash handout plan and more public spending on programs like quake-proofing the country’s public schools, to revive the economy.

Investors have shown recent optimism in Japan’s economy; shares in Tokyo recently rallied to their highest levels since early October.

But the Nikkei 225 average dipped 1.5 percent in early trading Monday after the numbers were announced, after weak consumer sentiment data in the United States sent Wall Street lower on Friday.

Still, the outlook for Japan remains unclear, and some analysts question whether the economy can sustain this recovery after stimulus measures at home and elsewhere run their course. Falling employment and wages are also expected to weigh on consumer spending for some time.

Japan’s jobless rate hit a six-year high of 5.4 percent, and wages showed a record drop in June on an annual basis, dragging down consumer spending. Weak demand, coupled with falling oil prices, have put downward pressure on prices here, raising fears of prolonged and damaging deflation.

“With the factors driving the current rebound being temporary in nature, a self-sustaining recovery is still not in sight,” Ryutaro Kono, Tokyo-based economist for BNP Paribas, told clients in a report published before Monday’s numbers.

The latest growth recoups only a small fraction of the 8.8 percent the Japanese economy has lost since peaking in early 2008, Mr. Kono said.

Private capital investment and real estate values also remain weak, economists say.

Although production activity has increased with the turnaround in exports, “we have yet to see ‘active production’ backed by capital investment,” Kyohei Morita, chief economist for Japan at Barclays Capital, wrote in a note.

Though exports and industrial production are recovering, their levels remain well off their peak, saddling companies with excess capacity and employment, Mr. Morita said.

The Bank of Japan struck a similarly cautious note over prospects for a sustained recovery in a recent report. While the bank said the Japanese economy had stopped deteriorating, it warned that employment and wages would stay low for some time, hurting consumer spending. Despite this quarter’s growth, the bank predicts that Japan’s economy will contract 3.4 percent in the year to March 2010.

The latest uptick is unlikely to enhance the standing of Mr. Aso’s Liberal Democratic Party ahead of national elections this month, when many expect the party to lose its grip on power for only the second time in over half a century.

Voter surveys show that the Democratic Party, Japan’s main opposition party, which vows to put more money in the hands of consumers, is favored to beat the Liberal Democrats in the Aug. 30 balloting.

Support has soared for the Democrats and their ambitious election platform, which includes cash allowances to families with children, free tuition and lower gasoline taxes.

But some economists warn the Democrats’ plans will add to Japan’s growing debt, which already surpasses 180 percent of its gross domestic product.

Others say that Japan needs deeper structural reforms to raise productivity, especially in the face of a shrinking population. An overhaul of the tax and social insurance systems are also priorities for Japan.

Unless Japan can maintain robust growth into next year, the country will have suffered another “Lost Decade” of economic growth, after limping through much of the 1990s with little growth, Yutaka Harada, chief economist at the Daiwa Institute of Research, wrote in a recent note.

“Ten years after our Lost Decade, we’re finding ourselves in the midst of a second Lost Decade,” Mr. Harada said.

A previous version of this article included an outdated figure for Japan's economic growth in the first quarter. The correct figure was an economic contraction of 11.7 percent, not 14.2 percent.