Japan outlook weak as growth revised down

City A.M. Reporter

n's economy shrank in the second quarter at a faster pace than initially reported as companies held back on capital expenditure due to worries about a rising yen and faltering global growth, new data shows.

Economists say Japan is likely to resume growing in the third quarter after three consecutive quarters of contraction, boosted by a rapid recovery in supply chains following the March 11 earthquake, but the outlook further ahead looks increasingly in doubt.

Other data pointing to weak business investment and a dip in exports increasingly suggest Japan will not be able to rely much on external demand.

"As capital spending is unlikely to grow as strongly as previously thought, a rebound in GDP in July-September may be smaller than initially thought although gradual recovery is still expected," said Yuichi Kodama, economist at Meiji Yasuda Life Insurance in Tokyo.

"There are also increased chances of the yen's appreciation in the coming month due to the Federal Reserve's expected easing and the latest Swiss move. The BOJ may be prompted by market moves, rather than the economy's performance, to ease its policy."

Gross domestic product shrank a revised 0.5 per cent in the second quarter, bang in line with the median market forecast and compared with the initially reported 0.3 per cent contraction, Cabinet Office data has shown.

On an annualised basis, the economy contracted 2.1 per cent, against a 2.2 per cent fall expected by economists.

Capital expenditure fell a revised 0.9 per cent, compared with an initially reported 0.2 per cent rise and a 1.9 per cent fall expected by economists.

Private inventories contributed 0.1 percentage point to GDP, less than a 0.3 percentage point contribution in preliminary data as parts shortages eased for some firms, allowing companies to finish partially manufactured goods, a government official said.

In another encouraging sign, government consumption and investment made a slightly positive contribution to GDP due to spending and investment in tsunami-hit areas on temporary housing and other items, the official said.