Japan’s Economy Grows at 2.3% Pace, Less Than First Estimated

By Jason Clenfield and Tatsuo Ito

Sept. 11 (Bloomberg) -- Japan’s economy unexpectedly grew less than initially estimated in the second quarter as companies cut spending and stockpiles fell.

Gross domestic product expanded at an annual 2.3 percent pace in the three months ended June 30, slower than the 3.7 percent reported last month, the Cabinet Office said today in Tokyo. Economists surveyed by Bloomberg News forecast the figure to be unchanged from the preliminary estimate.

Today’s report shows Japan’s recovery from its deepest postwar recession is even weaker than previously thought, and intensifies pressure on the incoming government, led by Yukio Hatoyama, to resuscitate household demand. With unemployment at a record high and one-third of factory capacity idle, Japanese growth may depend on overseas demand.

“It’s hard to say when the economy will return to where it was before the unprecedented contractions in previous quarters,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The DPJ will be forced to come up with more specific growth strategies to help the economy.”

The Nikkei 225 Stock Average fell 0.4 percent at the lunch break in Tokyo. The yen traded at 91.41 per dollar from 91.65 before the report was published.

From the previous quarter, the world’s second-largest economy grew 0.6 percent, less than the 0.9 percent the Cabinet Office estimated last month. That compares with a 0.1 percent contraction in Europe and a 0.3 percent drop in the U.S.

In a sign that overseas demand is holding up, reports from China today showed industrial production rose the most since August 2008 and new lending unexpectedly accelerated.

Stockpiles Decline

Net exports -- the difference between exports and imports -- contributed 1.6 percentage points to Japan’s expansion, unchanged from the first reading. That was offset by the deeper- than-expected decline in stockpiles, which subtracted 0.8 percentage point from quarterly output, more than the 0.5 percentage point first reported.

The inventory figures suggest manufacturers have more room to increase output to replace stockpiles they ran down when global trade seized up in the wake of the global financial crisis, said Shinke at Dai-Ichi Life. Companies increased production at the fastest pace in half a century last quarter.

“The negative contribution from inventories isn’t necessarily bad news,” Shinke said. “It’s likely to be a plus for growth this quarter.”

Reports since the second quarter suggest the economy is slowing. Gains in industrial production decelerated for a fourth month in July, the jobless rate jumped to an unprecedented 5.7 percent, and machinery orders, an indicator of capital spending, tumbled 9.3 percent.

‘Weak Recovery’

“This is a weak recovery,” said Tetsuro Sugiura, chief economist at Mizuho Research Institute in Tokyo. “Consumers and business are anxious about the outlook.”

Toyota Motor Corp., which estimates it will make about a third fewer cars this year than it has the capacity to build, said last month it will close an assembly line at its Takaoka plant in central Japan. The carmaker plans to cut capital spending by 36 percent in the year ending March 31.

Japan Airlines Corp. posted a 99 billion-yen ($1.1 billion) loss in the first quarter, the most in at least six years, as business and leisure travel plummeted. The airline plans to cut 1,400 administrative jobs domestically, starting next month.

Economic and Fiscal Policy Minister Yoshimasa Hayashi said spending cuts by companies “indicate the outlook for the economy is still murky.”

Cash Handouts

Capital spending declined 4.8 percent last quarter, more than the 4.3 percent initially reported, today’s report showed. Consumption rose 0.7 percent, spurred by cash handouts and incentives introduced by the outgoing Liberal Democratic Party- led government to buy cars and electronics.

Finance Minister Kaoru Yosano said the GDP report shows “Japan’s economy isn’t experiencing a full-fledged recovery” and he urged the new government to “make its utmost efforts to put Japan’s economy on a sustainable growth path.”

The Democratic Party of Japan will take power for the first time on Sept. 16 after last month’s landslide election victory.

Declining corporate profits and falling tax revenues may make it difficult for the party to fund its promises to encourage more consumer spending through childcare handouts and abolishing highway tolls. The DPJ pledged not to increase new bond sales to avoid expanding a debt burden that’s the largest in the industrialized world.

“They’re saying they’ll finance their projects by reshuffling the budget,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “Under the best of circumstances that wouldn’t be easy.”

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