Japan slowdown risks Kan's fiscal ambitions

Agence France-Presse

Posted at Aug 15 2010 02:08 PM | Updated as of Aug 16 2010 12:10 AM

TOKYO- Japanese data released on Monday are expected to show the country's economy expanding at its slowest rate in three quarters, as an export-driven recovery falters amid growing fears for the global economy.

A median forecast of economists polled by Dow Jones Newswires suggests Japan will post a fifth straight quarter of growth in April-June, notching up an annualized expansion of 2.3%, less than half the 5%  level posted in the previous quarter.

Such data would pose a challenge for Prime Minister Naoto Kan's government, which must balance an uncertain economic reality with an agenda dominated by the need to cut the industrialised world's biggest public debt.

"With the need to rebuild its public finances, the Japanese government has its hands tied," said Norinchukin Research Institute economist Takeshi Minami, who believes further stimulus is needed as the recovery loses steam.

Also hanging over policy-making is the looming prospect that China will overtake Japan as the world's second-largest economy, underlining its growing global clout after becoming the world's biggest exporter, auto market and steelmaker.

By contrast, Japan's "growth has moderated significantly, and the momentum of the economic recovery is weakening," said Yoshiki Shinke, Dai-Ichi Life Research Institute senior economist.

In June, Japan's unemployment rate edged higher to 5.3% while production of automobiles and electronic gadgets underwent a surprise slip, amid signs that an export-driven recovery may be stalling.

Shipments of cars, gadgets and components have been crucial in off-setting weaker demand at home, but concern is mounting that Japan may be hit by Beijing's efforts to cool China's economy, together with fragile eurozone and US demand.

Deflation and weak domestic demand have long burdened Japan, as consumers tend to put off purchases in the hope of further price falls.

The planned expiry of government incentives to purchase cars in September may also weigh on production for the domestic market just as the overseas climate worsens, analysts say, although a consumer rush before the benefit ends may boost third quarter figures.

Meanwhile US economic growth slowed dramatically in the second quarter, down sharply to 2.4% from 3.7% in the first quarter.

Such slowing global expansion is cooling an export sector that is also anxious about the strength of the yen, which recently touched a 15-year high against the dollar.

For every one-yen rise in the currency's value against the dollar, companies can lose tens of billions of yen earned overseas when repatriated, threatening a core part of Japan's economy.

Kan's hopes of capping spending and debt issuance to eventually reduce a public debt approaching 200%  of GDP and avoid a Greek-style meltdown therefore look highly ambitious, analysts say.

"Japan needs to quickly implement measures to tackle the strong yen, including currency intervention," said Minami.

"The government will shift its focus towards financial measures through the Bank of Japan, such as currency intervention or pumping extra money. It needs to continue maintaining an easy monetary policy."

Many analysts say 2010 is the year China will replace Japan as the world's second-largest economy, but the recent strength of the yen adds complexity to comparisons between the countries on a nominal basis.

Takahide Kiuchi, chief economist at Nomura Securities, estimates Japan's nominal first-half GDP at $ 2.647 trillion, using an average dollar exchange rate that saw the yen appreciate strongly towards the end of the January-June period.

That compares to China's first-half GDP of $2.53 trillion dollars, calculated from government data and average monthly exchange rates given by the People's Bank of China.

China came close to overtaking Japan in 2009 when its gross domestic product reached $4.98 trillion  -- just behind Japan's $5.07 trillion.