Japan Q2 2007 GDP Slowdown and Recovery

From the FT today:


Slowdown fails to dent Japanese recovery

By Michiyo Nakamoto in Tokyo

Published: August 13 2007 18:48 | Last updated: August 13 2007 18:48

The Japanese economy grew at a slower pace than expected in the second quarter, but the underlying picture of a recovering economy remains intact, economists said on Monday.

Real gross domestic product rose by only 0.1 per cent in March to June compared with the preceding three months as weak exports and a fall in housing and public investment took their toll on the broad economic figures.

Thanks to firm consumption and corporate investment, however, the economy did not stagnate. “The data suggest that the economy is growing at a decent pace,” Hiroshi Shiraishi, economist at Lehman Brothers in Tokyo, noted.

Although the growth rate has dropped from 0.8 per cent in the January-March quarter and 1.3 per cent in last year’s final quarter, the dramatic decline in the headline figures was caused by a drop in quarterly export growth from 3.4 to 0.9 per cent and sharp falls of 2.1 per cent in public investment and 3.5 per cent in residential investment.

This masked a much less serious slowdown in Japan’s private sector economy. Household consumption growth slowed from 0.8 per cent in the first quarter to 0.4 per cent. Private sector investment grew by 1.2 per cent, up from the 0.3 per cent growth in the first quarter, something Richard Jerram, economist at Macquarie Securities, said was encouraging.

Analysts said the weaker figures should not affect the Bank of Japan’s decision whether or not to raise rates next week, although a rise would be unlikely following global market jitters related to the US subprime mortgage market.

The BoJ on Monday injected a further Y600bn ($5bn, €3.7bn, £2.5bn) into the money market, following its Y1,000bn emergency fund injection on Friday, in a move aimed at easing pressure on the overnight money market interest rates, which edged up higher than the bank’s target of 0.5 per cent. But these operations have been small compared with those in the eurozone and the US as Japanese banks have not found it nearly as difficult as European banks to borrow from each other on a short-term basis.

“The impact is limited. There is no panic widening of spreads in Japan,” says Takahiro Tazaki, director of structured credit and securitisation research at Barclays Capital in Tokyo.

And on Monday the Tokyo Stock Exchange regained its composure, with the benchmark Nikkei 225 closing up 35 points at 16,800.05. The broader Topix index, however, fell to 1,632.64, its lowest close since December last year.

Some analysts believe the BoJ could still raise rates this month, although that possibility has receded amid global market turmoil. “We still think there is a 50 per cent chance the BoJ will raise rates,” said Mr Shiraishi.

However, “it will be difficult to raise rates”, unless global markets stabilise fairly early on this week, he added.

The importance of exports to Japanese growth rates shows the economy to remain vulnerable if the US and European economies slow down as a result of the crunch in the credit markets.