Japan economy contracts in June quarter on weak exports

Burdened by weaker consumer spending and exports, Japan's economy contracted in the second quarter, government data showed on Monday, the first such setback since a short but painful recession last year.

The Cabinet Office said gross domestic product fell at an annualized rate of 1.6 per cent in the three months through June.

Japanese growth rates have fluctuated wildly in recent quarters, and the latest downturn only partially erased gains from a strong expansion in the first quarter, which the government now estimates at 4.5 per cent. Last year was even more volatile: Consumer spending surged before a sales tax increase in April 2014, lifting the economy to its fastest pace in years, then evaporated afterward, setting off a recession.

The size of the contraction in the quarter through June was roughly in line with the expectations of private-sector economists. In surveys by news agencies, analysts had forecast an annualised contraction of 1.8 per cent to 1.9 per cent, on average.

But economists say the tide may be turning back to growth in the current quarter. In a recent survey by the Japan Center for Economic Research, an affiliate of Nikkei, Japan's largest financial newspaper, 40 analysts predicted that growth would rebound by an average 2.5 per cent in the period from July to September.

"Temporary factors were a big part of it, though I'm not saying the only part," Akira Amari, the economy minister, told reporters, referring to the second-quarter downturn. Rainy, cool weather in June hurt sales of air conditioners - a major seasonal item in humid Japan - while an increase in taxes on ultra-small cars weighed on the auto industry, he added.

The slowdown is nonetheless a setback for the government of Prime Minister Shinzo Abe, which has been trying to pull the economy out of nearly two decades of deflation through a stimulus program known as Abenomics.

The program, under which the central bank injects vast amounts of cash into the economy, has kept borrowing costs low and weakened the yen. It has been a boon for global manufacturing companies like Toyota that earn much of their revenues abroad in currencies like dollars and euros.

But while Abenomics has increased profits at big corporations and lifted the stock market, many ordinary Japanese say they feel few benefits. Jobs are plentiful - the unemployment rate is just 3.4 per cent, close to an 18-year low - but the paychecks that go with them buy less than they used to. Adjusted for inflation and taxes, average wages have been stuck in a persistent decline.

Household spending fell at an annualized rate of 3.1 per cent in the second quarter, the economic report on Monday showed. A government sentiment survey released last week showed consumer confidence had slipped to its lowest level since January.

Pay has been increasing comfortably for some workers. Toyota, for instance, this year increased base wages for its Japanese work force by the largest margin in 13 years. But economists caution that gains have accrued disproportionately to those with permanent jobs at major companies - an elite but shrinking minority.

Many of the jobs that have been created since Abe became prime minister at the end of 2012 have been part-time or temporary, with lower pay and fewer benefits. Exports, which have been hurt by a weaker Chinese economy, tumbled at an annualized rate of 16.5 per cent last quarter, according to the economic report. That was only partially offset by a 9.8 per cent decline in the value of imports.

China's rapid development in recent years has had spillover benefits for Japan, where experienced manufacturers of industrial machinery have supplied much of the equipment used in China's proliferating factories. China supplanted the United States as Japan's largest trading partner several years ago.

Thus the slowing pace of growth in China - and, in particular, a decline in demand for capital goods - has hurt important parts of Japan's export economy.

The quarterly contraction in Japan could revive speculation on whether the central bank will step up its stimulus efforts. The Bank of Japan has been pouring money into the economy by buying government bonds from the market at a rate of 80 trillion yen a year, or close to $700 billion.

Yet the sustained increase in consumer prices that it hopes to generate as a result has been elusive.

© 2015 The New York Times News Service

FLUCTUATING GROWTH

• Japanese growth rates have fluctuated wildly in recent quarters, and the latest downturn only partially erased gains from a strong expansion in the first quarter
• The size of the contraction in the quarter through June was roughly in line with the expectations of private-sector economists
• The slowdown is nonetheless a setback for the government of Prime Minister Shinzo Abe, which has been trying to pull the economy out of nearly two decades of deflation through a stimulus program known as Abenomics