Japan Q2 2007 GDP and BoJ

From Bloomberg today:

Japan's GDP Growth Slows, Reducing Rate-Rise Chance


Japan's economic growth slowed more than economists forecast in the second quarter, making it less likely the central bank will raise interest rates next week after a global credit crunch.

The world's second-largest economy expanded at a 0.5 percent annualized rate in the three months ended June 30 from a revised 3.2 percent in the first quarter, the Cabinet Office said in Tokyo today. The median estimate of 27 economists surveyed by Bloomberg News was for 0.9 percent growth.

The report is the last main economic indicator before the Bank of Japan's Aug. 22-23 meeting to decide whether to raise the key overnight lending rate from 0.5 percent, the lowest of major economies. Investors already pared bets of a rate increase last week after global overnight interest rates surged because of rising losses linked to U.S. subprime mortgages, prompting central banks to inject cash into their financial systems.

``This won't encourage the Bank of Japan to go ahead with a rate hike in August, especially with the turmoil in the markets,'' said Takashi Omori, chief economist at UBS Securities Japan Ltd. in Tokyo. ``September is very likely, unless there is further turmoil.''

The yen traded at 118.33 per dollar at 4 p.m. in Tokyo, from 118.27 before the report. The yield on Japan's benchmark 10-year bond was unchanged at 1.715 percent. The Nikkei 225 Stock Average rose 0.2 percent to 16,800.05.

Market Turmoil

The Bank of Japan injected 600 billion yen ($5.1 billion) into the financial system today, an amount it has supplied on more than 20 occasions this year, after adding 1 trillion yen on Aug. 10. Central banks in the U.S., Europe, Japan, Australia and Canada pumped $154 billion to their systems on Aug. 9 and $135.7 billion on Aug. 10 to avert a credit shortage.

Investors see a 32 percent chance of rate increase next week, down from as high as 75 percent on Aug. 9, according to Credit Suisse Group calculations based on interest payments.

Tomoko Fujii, a senior economist and strategist in Tokyo at Bank of America N.A., pushed back her rate forecast from August to September last week because of the market tumult. Waiting until the Sept. 18-19 board meeting will allow the bank to fully gauge the effect of the subprime issue on markets, Fujii said.

The economy grew 0.3 percent in nominal terms, which don't take into account price changes, the Cabinet Office said, faster than the 0.2 percent expected by economists.

GDP Deflator

The GDP deflator, a broad measure of price changes, fell 0.3 percent from the same period a year earlier, less than analysts' predictions of a 0.4 percent drop. The domestic demand deflator, regarded by economists as key measure of price trends, rose 0.2 percent, the third increase in the past nine years.

``The fact that the domestic demand deflator is positive is reassuring as it shows the economy is making progress toward emerging from deflation,'' said Junko Nishioka, an economist at ABN Amro Securities in Tokyo.

Consumer spending rose 0.4 percent from the previous three months, half the pace of the first quarter.

Japan's consumers are losing the incentive to spend because of falling wages and higher taxes. Household sentiment fell to a two-year low in July and wages slumped for a seventh month, even as the jobless rate fell to a nine-year low of 3.7 percent.

``Tax-burden increases are weighing on sentiment, so any rebound in spending is going to be limited,'' said Junichi Makino, a senior economist at Daiwa Research Institute in Tokyo.

Falling Wages

Falling wages are reducing inflationary pressure. Consumer prices excluding fresh food fell 0.1 percent in June from a year earlier, a fifth monthly drop.

Reports in the past month suggest private consumption will wane, increasing the burden on exporters and manufacturers to drive the economy's expansion.

Capital investment climbed 1.2 percent last quarter, today's report showed, accelerating from a 0.3 percent gain in the first three months.

Machinery orders, a key gauge of companies' investment plans, are forecast to climb this quarter and production reversed a three-month slump in June, helped by the fastest export growth in five months. Companies plan to boost spending at the quickest pace since 1990, a survey showed this month.

Sharp Corp. and construction equipment maker Komatsu Ltd. will boost spending on factories and equipment. Toyota Motor Corp., Japan's largest automaker, said it had record profits in the three months ended June 30.

Exports Contribution

The contribution to GDP from net exports -- or the difference between exports and imports -- was unchanged. Economists expected a 0.1 percentage point detraction.

Exports gained 0.9 percent, more than the 0.6 percent expected. Imports rose 0.8 percent, less than analysts' 1.6 percent prediction.

A separate report today showed Japan's current account surplus, the broadest measure of trade, widened 48 percent to 1.52 trillion yen in June from a year earlier.

Companies reduced inventories in the quarter, subtracting 0.1 percentage point from growth. Economists expected the inventory contribution to GDP to be unchanged.

Bank of Japan Governor Toshihiko Fukui has signaled he won't be deterred by a weak GDP report. The bank expects growth to slow in the second quarter and that won't determine the outcome of the August policy meeting, he said on July 12.