Slump in Japan's GDP worse than expected

THE dramatic slump in Japan's gross domestic product (GDP) during the second quarter of this year was worse than the initially estimated annualised contraction of 6.8 per cent announced last month. It actually amounted to a 7.1 per cent drop, the Japanese Cabinet Office announced on Monday.

This increases the likelihood that the Bank of Japan will need to announce fresh monetary stimulus when its Policy Board meets next month, while it also reduces the likelihood of the government proceeding with a planned further hike in consumption tax next year, analysts said.

Output had been expected to plummet in the second quarter following the surge in first quarter sales in advance of the hike in the sales tax (from 5 per cent to 8 per cent) introduced on April 1. But the drop - the worst in five years - has proved to be even sharper than feared.

The drop reflected declines in household spending and housing investment as well as weakness in demand for Japanese exports and relative weakness in corporate capital spending and industrial production.

Growth in GDP is measured from quarter to quarter and output for the three months from July to September is expected to rebound when compared to the weak second quarter (just as the April-June figures suffered in comparison with the strong first quarter). But the extent of the recovery will be critical for policy, analysts said.

The government will "carefully watch" the consumption trend, Chief Cabinet Secretary Yoshihide Suga said on Monday.

Chief economist Junichi Makino at SMBC Nikko Securities in Tokyo said in a report on Monday that the Japanese economy is likely to bounce back in the third quarter but that the pace of recovery is "not expected to be strong".

A sluggish recovery in the July-September period may cloud the central bank's goal of raising Japan's inflation rate to 2 per cent, and also jeopardise the government's aim to raise the sales tax rate further to 10 per cent from October next year, Mr Makino suggested.

Prime Minister Shinzo Abe is under strong domestic and international pressure to go ahead with the second stage of the consumption tax hike in view of the country's precarious fiscal position, and with the government's gross outstanding debt to GDP ratio standing at a record level of around 230 per cent.

Former finance minister Sadakazu Tanigaki, whom Mr Abe last week promoted to the position of chief cabinet secretary (the second most important slot in the cabinet), is expected to push for a further hike in the consumption tax and even BOJ governor Haruhiko Kuroda last week added his support for such a move.

Along with slumping household sales in the wake of the April tax rise, exports are dragging the economy despite a 20 per cent drop in the yen exchange rate against the US dollar since the BOJ announced dramatic monetary easing measures in March 2013.

Recently, the yen has resumed its downward plunge (partly reflecting strength in the US dollar) and doubts are being voiced about how far this depreciation will benefit Japan's economy, given the weak external demand and rising import costs.

On Monday, Sadayuki Sakakibara, chairman of leading business lobby Keidanren, complained that rapid moves in the value of the yen are undesirable. The current level of around 105 to the US dollar is an appropriate level for the economy, he said, implying that a weaker yen could become a liability.

The weaker yen, along with export sluggishness and sharply increased import costs for energy and other commodities, has pushed Japan's international trade account into the red for more than a year now and has even led to red ink in the broader current account.

Japan's current account swung back into the black in July, Ministry of Finance data showed on Monday, reflecting higher earnings on overseas investments. But deficits could continue on both trade and current accounts, especially if the yen weakens even further from here, analysts said.

This poses a dilemma for the Bank of Japan which is coming under increased pressure to announce further monetary easing measures in order to spur economic growth. Renewed easing would very likely result in further weakening of the yen.