Japan Economy Shrank Annual 3%, Revised Figures Show

By Jason Clenfield

Sept. 12 (Bloomberg) -- Japan's economy contracted more than the government initially estimated last quarter after figures showed businesses cut spending.

Gross domestic product shrank an annualized 3 percent in the three months ended June 30, the Cabinet Office said today, more than the 2.4 percent drop reported last month. The median estimate of 27 economists surveyed by Bloomberg News was for a 3.1 percent contraction.

Bank of Japan Governor Masaaki Shirakawa said last week growth in the world's second-largest economy is likely to ``remain sluggish for the time being.'' With little room for interest-rate cuts or government stimulus, Economic and Fiscal Policy Minister Kaoru Yosano said there's ``nothing to be done but wait'' for the country's export markets to recover.

``Japan's economy will keep slowing at least until the end of this year,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo. ``Compared with previous recessions, this one will be very shallow. We're at the deepest point of the downturn now.''

The yen traded at 107.25 per dollar at 9:17 a.m. in Tokyo from 107.14 before the report was published.

Stalled growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep interest rates unchanged for the rest of the year, according to economists surveyed this week. At 0.5 percent, Japan's key rate is the lowest among major economies.

Leadership Battle

Yosano and four other lawmakers are battling for the leadership of the ruling Liberal Democratic Party after Yasuo Fukuda announced his resignation as prime minister this month. Whoever wins will have little scope to spend on the economy because of public debt that the Organization for Economic Cooperation and Development estimates is 180 percent of GDP, the biggest in the industrialized world.

From the first quarter, the economy shrank 0.7 percent, the biggest drop since the third quarter of 2001 and more than the 0.6 percent initially reported. Economists expected a 0.8 percent contraction.

Business spending slid 0.5 percent from the first quarter, more than twice the pace of the 0.2 percent drop reported last month. The revision reflected Finance Ministry figures last week that showed capital spending fell for a fifth quarter.

Slumping U.S. demand has forced exporters including Toyota Motor Corp. to cut production and jobs. A Kyushu-based Toyota subsidiary reduced output of sport-utility vehicles by at least 10 percent and fired 800 workers since June.

Deteriorating

Markets outside the U.S. are also deteriorating. The European economy shrank for the first time in almost a decade last quarter, and EU Commissioner Joaquin Almunia said this week that the outlook is ``unusually uncertain.''

Sales of construction equipment by companies including Komatsu Ltd. will fail to meet industry forecasts because of lower demand from India and China, the Japan Construction Equipment Manufacturers Association said last month.

``The market is heading into a turning point,'' said Michijiro Kikawa, chairman of the association and president of Hitachi Construction Machinery Co. ``Although we expect the strength of emerging markets to continue, the speed of growth will decelerate.''

Exports dropped 2.5 percent and imports fell 2.6 percent. Net exports subtracted 0.1 percentage point from gross domestic product compared with the first quarter.

Even as exports weaken, economists say companies are better able to withstand the slowdown because they have shed the excess workers, factory lines and debt that contributed to a decade of economic stagnation in the 1990s.

Oil Prices

Further declines in oil prices, which have eased 30 percent since reaching a record in July, will benefit Japan even more than other economies, according to Julian Jessop, chief international economist at Capital Economics Ltd. in London. Jessop says Japan is unique in having escaped the credit crunch and the housing collapse that's hit the U.S. and Europe.

Without adjusting for inflation, Japan's economy shrank 0.8 percent in the second quarter from the previous three months, more than the 0.7 percent in the preliminary report.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net