Japan’s Economy May Return to Growth as Output Climbs

By Toru Fujioka and Shizuka Muragishi

May 1 (Bloomberg) -- Japan’s economy may return to growth as soon as this quarter as companies increase production in response to inventory cuts and consumer demand shows signs of picking up in some markets.

The economy may expand at an annual 1.2 percent pace in the second quarter, according to the median estimate of 10 economists surveyed by Bloomberg News after a report yesterday showed industrial production rose for the first time in six months and companies predicted increases in April and May.

Growth would allow Prime Minister Taro Aso, who has announced three stimulus packages since becoming the nation’s leader in September, to claim credit just as he prepares for elections that must be called by September. The Bank of Japan said the world’s second-largest economy will resume expanding in 2010 after shrinking 3.1 percent this fiscal year.

“An early return to positive growth quarter-on-quarter would point to a much better 2010,” said Julian Jessop, an economist at Capital Economics Ltd. in London. “The recovery seems to have plenty of positive momentum,” he said, citing corporate predictions that production will increase 4.3 percent in April and 6.1 percent in May.

The Nikkei 225 Stock Average climbed 0.3 percent at the morning break today, taking its gain to 25 percent since reaching a 26-year low on March 10. Stocks were also buoyed after consumer spending in the U.S., Japan’s biggest overseas customer, jumped the most in two years in the first quarter, according to gross domestic product figures released April 29.

Fujitsu Soars

Shares of Fujitsu Ltd., Japan’s biggest computer-services provider, rose 19 percent in Tokyo trading after the company forecast it will return to profit this fiscal year on narrowing losses in its chip business.

Former Federal Reserve Chairman Paul Volcker said this week the U.S. economy is “leveling off at a low level” and doesn’t need a second stimulus package. Volcker is the head of Obama’s Economic Recovery Advisory Board. In the U.K., consumer confidence climbed to the highest level in a year this month.

In its twice-annual outlook yesterday, the Bank of Japan predicted a “moderate” recovery from the second half of the current fiscal year.

“Economic conditions are likely to continue deteriorating in coming months but gradually level out thereafter, and the growth rate is expected, from the latter half of fiscal 2009, to recover at a moderate pace,” the central bank said. Gross domestic product will rise 1.2 percent in the year starting April 2010, it said.

Shrinking Economy

Japan’s economy shrank 12.1 percent in the fourth quarter of last year and a report on May 20 will show a contraction of 10.9 percent in the first three months of 2009, according to the median estimate of economists surveyed by Bloomberg News.

The unemployment rate surged to a four-year high of 4.8 percent in March and consumer prices fell for the first time in 18 months, indicating any recovery is likely to be weak. Wages dropped 3.7 percent, and household spending fell for a 13th month, capping off the worst losing streak since the data were first compiled in 1964.

“The panic is over, but that doesn’t mean we are not in the middle of a deep recession,” said Robert Feldman, head of research at Morgan Stanley in Tokyo. “Wages have only just begun to fall. Corporate profits are terrible.”

Even with the increase in output, only about half the nation’s productive capacity is being used, hurting profits and exerting pressure on companies to keep cutting costs and wages.

“We are at levels of production that would suggest that low capacity utilization will keep capital expenditure very, very low for a long time,” said Feldman.

Mitsubishi Electric

Mitsubishi Electric Corp. yesterday forecast its first loss in seven years because of record losses at its 45 percent owned Renesas Technology Corp., a computer chip maker.

Cost reductions have “cut into demand for corporate services and the wages of workers,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “The environment surrounding non-manufacturers and households has become increasingly severe.”

Barclays predicts the economy will grow at an annual 3.7 percent pace in the second quarter.

Any decline in wages may be partially offset as Prime Minister Aso’s third stimulus package is implemented later this year. The 15.4 trillion yen ($158 billion) spending plan includes measures to bolster the job market, encourage investment in energy-efficient technology and provide credit to companies. Aso leads the ruling Liberal Democratic Party.

Aso’s Cabinet approval rating rose 5.9 percentage points to 29.6 percent, helped by a political funding scandal in the country’s main opposition party, Kyodo News said yesterday.

“Aso has implemented stimulus packages and he will of course take credit for the recovery,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official. “The election, which everybody once thought the LDP would lose for sure, is becoming difficult to call.”

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Shizuka Muragishi in Tokyo at smuragishi@bloomberg.net