Japan Brief/FPCJ, No. 0948
August 21, 2009


Japan’s GDP Posts Annualized 3.7% Growth in April-June Quarter

The Japanese economy grew at an annualized rate of 3.7% in the three months from April to June after four consecutive quarters of contraction. The sharp rebound was regarded as a signal that the worst might be over, although the prospects for recovery do not necessarily look solid.

In the statistics on gross domestic product (GDP) announced by the government on August 17, real growth adjusted to price changes came out to be an increase of 0.9% over the previous quarter, which translated into an annual growth rate of 3.7%, well over Japan’s growth potential estimated at 1%. In the wake of the global economic downturn, Japan suffered its worst postwar economic contraction of an annualized 13.1% in the fourth quarter of 2008, followed by an equally devastating 11.7% drop in the first quarter of 2009, the third steepest on record. In nominal terms—unadjusted to price changes—the April-June quarterly growth was minus 0.2%, marking five consecutive quarters of decline and therefore suggesting the risk of a deflationary spiral.

The rebound in growth in the April-June period was due to a high level of external demand, chiefly exports to Asian countries, and high-pitched government spending and personal consumption. Exports increased 6.3% over the previous period thanks to robust shipments to China centering on electronic components and some chemicals. The increase contrasted with a quarter-to-quarter drop of 22.5% in the January-March period.

Public works spending by the central and local governments, up 8.1% from the previous quarter, the highest increase since October-December 1998, also contributed significantly to the GDP growth. Personal consumption turned positive for the first time since July-September 2008, growing 0.8% over the preceding period as sales of such durables as eco-cars and TVs soared 6% following government incentives intended to promote them. Personal consumption accounts for nearly 60% of Japan’s GDP.

In a press conference following the announcement of the GDP figures, Economic and Fiscal Policy Minister Yoshimasa Hayashi stated clearly, “The fact that the GDP showed a positive turn reflects the looming effects of the government’s series of stimulus packages in the past, centering on public works investment and personal consumption.” Hayashi then said that he expected them to work as pump- priming measures to induce a full-fledged recovery (The Nikkei evening edition, August 17).

On the other hand, business capital investment continued sluggish, down 4.3% from the previous quarter for the fifth consecutive quarterly decline. Housing investment also declined 9.5% for a second consecutive quarterly drop. The dominant view of economists is that the weakness of capital investment and housing offset the positive performances of public works expenditure and personal consumption, indicating that the ostensible strength of domestic demand was only supported by the government’s stimulus policies.

The consensus among analysts is that Japanese firms are saddled with surplus workforce and production capacity and until these two excesses are worked out, their profitability will not lead to genuine recovery. Given that, the rising unemployment rate, which edged up to 5.4% in June, close to the past highest of 5.5%, is the most worrying issue in the economy.

Together with the fact that the pickup in exports to China was also dependent on demand created by that country’s stimulus policy, the weak base of domestic demand means that prospects for Japan’s full recovery in the future are less than optimistic.

Media Commentaries

Such concern was expressed by The Nikkei in its August 19 editorial titled “Although the worst is behind, the fog over the Japanese economy is not cleared.” It argued, “Caution is still warranted about the future of external demand that drove the GDP recovery in the April-June period. There are still many uncertain factors, such as the sustainability of China’s recovery of sharp growth stemming from the government’s huge fiscal stimulus and deep scars left by the US and European banking crisis. If overseas economies decelerate again, that will put strong downward pressure on Japan’s economy, which depends heavily on external demand. The base of domestic demand is even weaker.”

Prior to the release of the second quarter GDP statistics, the Asahi Shimbun warned about the risk of a deflationary spiral in its August 11 editorial. Referring to the 1.7% drop in the consumer price index in June, the newspaper said, “There is a danger of being trapped in a deflationary spiral in which falling prices due to diminished demand hurt corporate profits and capital investment, leading to contraction of the economy as a whole. Strong caution is needed to prevent that.”

In the meantime, the Yomiuri Shimbun gave high marks to the government’s series of stimulus packages. Its August 18 editorial read, “All this shows that the series of economic-stimulus measures put forward by the government and ruling parties since last summer can be viewed as a set of wisely crafted measures that helped prevent the economy from worsening, despite further deterioration in the nation's fiscal crisis.” It added, “But once the pump-priming steps' positive effects have run their course, there will be concern that consumer spending and public investment will slow down.” The Yomiuri also said, “At this stage, the government must not feel complacent about the short-term economic recovery and switch to belt-tightening policy measures, such as cutting down on public works projects.”

Last to comment on the GDP statistics was the Mainichi Shimbun. Its August 20 editorial, titled “Return to positive growth: It’s time to consolidate the economy’s foundation,” made a particular issue of the weakness of the household sector as an epitome of fragile domestic demand as a whole. It said that final household consumption expenditure during the April-June period “trailed the year-ago level by 0.9%. At a time when compensation for employees also trailed both from the previous quarter and from a year ago, no energy can be expected from households.” It went on, “There are many things that should be done [to improve the situation]. The government and private sector must join hands in working swiftly to consolidate the economy’s foundation.”

(Copyright 2009 Foreign Press Center, Japan)

*Japan Brief is an original production of the Foreign Press Center, Japan, and does not represent the views of the Government of Japan or of any other body.


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