Japan Economy Shrinks Less-Than-Estimated 1.1%, Surpassed by China in 2010

Japan’s gross domestic product fell less than estimated in the fourth quarter in a pullback that may prove temporary as overseas demand revives production after the nation fell behind China as the world’s second-largest economy.

The annualized 1.1 percent drop in GDP in the three months through December was driven by a slowing in exports and fading of government stimulus programs, Cabinet Office figures showed today in Tokyo. The median forecast of 26 economists surveyed by Bloomberg News was for a 2 percent drop.

Japan’s stocks rallied amid confidence the global economic recovery will strengthen as oil prices retreat and international political tensions subside with the resignation of Egyptian President Hosni Mubarak. The rebound is set to benefit Japanese exporters, with Toyota Motor Corp. and Komatsu Ltd. this year raising profit forecasts because of increasing sales abroad.

“This was just a temporary contraction and growth may accelerate more than investors anticipate this quarter and next,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo, who forecast a 1.3 percent decline. “The export decline was smaller than expected and shipments will keep expanding as long as Asia’s economies continue to boom.”

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Photographer: Haruyoshi Yamaguchi/Bloomberg

Signs advertise sales at a clothing store in Tokyo.

The Nikkei 225 Stock Average has risen 4.5 percent this year, and advanced 0.8 percent as of 10:51 a.m. in Tokyo today. Japan’s benchmark 10-year government bond yields have also climbed since the start of 2010, reaching a 10-month high of 1.35 percent last week. They slipped today to 1.30 percent. Japan’s currency traded at 83.35 per dollar. The yen reached a 15-year high of 80.22 on Nov. 1.

Trade Impact

Net exports, or shipments less imports, subtracted 0.1 percentage point from GDP, beating economists’ estimates of a 0.2 point drop. Overseas shipments declined 0.7 percent, also better than forecasts for a 1.6 percent decline. Imports dropped 0.1 percent compared with a forecast for a 0.9 percent decline.

GDP will expand 0.6 percent in the first quarter and accelerate to a 1.9 percent pace by the final three months of 2011, according to the median estimates of 14 economists surveyed by Bloomberg News before today’s report.

Private consumption dragged down GDP after the government ended a subsidy program to buy fuel-efficient cars in September and reduced incentives to purchase electronic home appliances in December, a program that will end in March.

“This was a temporary pullback from the stimulus boosts in the third quarter, so we don’t need to be too pessimistic about the economic outlook,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA. “The economy will likely gain traction toward the end of this year.”

Corporate Forecast

Toyota Motor, the world’s largest carmaker, last week raised its full-year profit forecast by 40 percent as sales in Asia and other emerging markets exceeded its estimates. Komatsu, the world’s second-largest maker of construction equipment, last month also raised its earnings forecast after increasing demand in Asia helped third-quarter profit more than triple.

“Japan bottomed out in the fourth quarter,” Yuichi Kodama, an economist at Meiji Yasuda Life Insurance Co., Japan’s third- biggest life insurer, said before the report. China’s economy is already showing signs of resurgence and the U.S. is rebounding, building up expectations of an export-led revival in Japan.”

Capital investment gained 0.9 percent in the fourth quarter from the previous three months. Consumer spending, which accounts for more than half of GDP, fell 0.7 percent after the government scaled back stimulus measures that drove growth in the third quarter.

China’s Rise

China’s $5.88 trillion GDP surpassed Japan’s $5.47 trillion in 2010, the Cabinet Office said today. Economic and Fiscal Policy Minister Kaoru Yosano said China’s expansion is a “welcome development.”

Government data released in the past month showed that machinery orders rose for the first time in four months in December, signaling a recovery in companies’ capital spending, while industrial production increased the most in 11 months and export growth accelerated.

“Companies are looking abroad to expand their production bases rather than increasing domestic business investment,” said Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo. “The recovery in capital spending could be weak.”

In an effort to bolster private demand, the Bank of Japan lowered its benchmark interest rate close to zero and has purchased financial assets ranging from corporate debt to exchange-traded funds. The central bank has pledged to keep rates on hold until the end of deflation is in sight.

BOJ Policy

“If the yen resumes its gains or Japan finds it difficult to emerge from deflation by the end of fiscal 2011, there could be calls for further monetary easing,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo.

Prime Minister Naoto Kan, who is trying to generate economic growth while keeping the world’s largest debt from increasing, has so far failed to persuade opposition lawmakers to agree on financing bills for his record 92.4 trillion yen ($1.1 trillion) budget for the year starting April. Finance Minister Yoshihiko Noda said Japan’s economy faces “the risk of economic slowdown” if parliament fails to move.

The GDP deflator, a gauge of price trends, fell 1.6 percent in the fourth quarter from a year earlier, smaller than the 2.1 percent drop in the previous quarter. In nominal terms, the economy contracted an annualized 2.5 percent in the fourth quarter, today’s report showed.

“There should be an effective policy response to try to address the fiscal deficit” said Thomas Byrne, senior vice president of Moody’s Investors Service, which has a stable outlook on Japan’s Aa2 sovereign credit rating. “Any policy drift or friction” that prevents passage of bills in parliament “would be a credit-negative development,” he said in an interview last week.

Standard & Poor’s lowered its sovereign-debt rating for Japan to AA- last month, the first reduction in nine years, saying that Kan’s government lacks a “coherent strategy” to reduce the country’s debt.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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