Japan Economy Probably Expanded for First Time in Five Quarters

By Jason Clenfield and Tatsuo Ito

Aug. 12 (Bloomberg) -- Japan’s economy grew last quarter for the first time in more than a year as rebounds in exports and consumer spending helped the country climb out of its worst postwar recession, the government is expected to say next week.

Gross domestic product expanded an annualized 3.9 percent in the second quarter, following a record drop of 14.2 percent in the three months ended March 31, according to the median estimate of 22 analysts surveyed before the report due Aug. 17.

More than $2 trillion in emergency spending by governments worldwide has buoyed sales for car and electronic-makers, and companies like Nippon Steel Corp. are filling orders from manufacturers restocking inventories depleted during the recession. Some 40 percent of Japan’s factories still sit idle, forcing firms to cut jobs and investment to eek out profits.

“The positive side of the story is that the worst is over,” said Tetsuro Sugiura, chief economist at Mizuho Securities Research Institute in Tokyo. “But the sustainability of the recovery is questionable. The second quarter is likely to be as good as it gets.”

The world’s second-largest economy is emerging from recession ahead of a national election on Aug. 30 that polls show Prime Minister Taro Aso’s ruling Liberal Democratic Party is expected to lose. The opposition Democratic Party of Japan, which has never held power, would inherit a jobless rate near a postwar high and a public debt twice the size of GDP.

The economy’s recovery hinges largely on the growth of its export markets. China, Japan’s top customer, expanded 7.9 percent last quarter from a year earlier, propelled by government spending and a boom in bank lending that some economists say may lead to a bubble. The U.S. shrank an annualized 1 percent, its best performance since the second quarter of 2008.

Export Driven

Japan’s growth last quarter was driven by exports that jumped 9.2 percent versus the previous three months, the first gain in three quarters, according to economist forecasts. Demand from China has helped to limit losses for companies including Komatsu Ltd. and Nissan Motor Co.

Consumer spending, which makes up about 60 percent of the economy, probably rose 0.9 percent. Aso’s 25 trillion yen ($258 billion) in stimulus has lifted household confidence to its highest level since 2007. The packages, which include incentives to encourage the purchase of eco-friendly products, are the main reason Toyota Motor Corp. is predicting its domestic sales will rise for the first time in five years.

Weak Recovery

Optimism about the nation’s recovery has helped the Nikkei 225 Stock Average advance 50 percent since it touched a 26-year low on March 10. Some 15 percent of firms listed on the first section of the Tokyo Stock Exchange raised first-half earnings estimates since June, according to Tokyo-based Shinko Research.

To be sure, Japan’s expansion in the three months through June 30 doesn’t make up the ground lost during the previous four quarters of contraction that shrank the economy to its 2003 size. Bank of Japan Governor Masaaki Shirakawa said yesterday there’s no guarantee that demand will gain momentum.

“The bounce will recoup only a tenth of what we lost,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “If sales recover only to 80 percent of peak levels -- and that’s what we expect -- then quite a few firms will find it difficult to cover fixed costs. They’ll need to do more aggressive restructuring.”

Nippon Steel, the country’s biggest mill, this month restarted one of its idled furnaces to fill orders from makers of cars and electronics rebuilding inventories. The company is still running 25 percent below full capacity.

Record Unemployment

Economists predict low production levels will drive the jobless rate to a record 5.8 percent next year from the current 5.4 percent. Japanese workers are also suffering unprecedented wage cuts that are likely to damp spending once the effect of the government’s stimulus package tapers off.

Business investment, which makes up about 15 percent of the economy, probably fell 5.4 percent in the second quarter, economist predict the GDP report will show.

Cost cuts by corporate Japan are taking a toll on companies such as Canon Inc. The nation’s biggest maker of office equipment last month forecast sales will drop 22 percent this year as clients limit spending on copiers and other business tools. To cope with that, Canon said it will pare its own expenses by 220 billion yen.

“Once the impact of the inventory rebuild and fiscal stimulus fades, you’ll start to see the more negative side of the adjustment,” said BNP’s Shiraishi, referring to the job and investment cuts that companies are making. “It’s already happening underneath, but once the temporary factors supporting growth fade it’ll be more clear.”

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Tatsuo Ito in Tokyo at tito2@bloomberg.net