Japanese Economy Contracts Less Than Estimated on Post-Tsunami Investment

Japan’s economy contracted less than economists estimated in the second quarter as reconstruction work counters the effects of the record March 11 earthquake and a strengthening yen.

Gross domestic product shrank at an annualized 1.3 percent rate in the three months ended June 30, marking three consecutive quarters of declines, the Cabinet office said today in Tokyo. The median forecast of 25 economists surveyed by Bloomberg News was for a 2.5 percent drop.

Finance Minister Yoshihiko Noda said today that the world’s third-biggest economy will probably resume its expansion this quarter after pledging yesterday to take “bold action” to curb yen gains if necessary. The nation’s former top currency official Eisuke Sakakibara said today Japan’s currency may rise to a postwar record, threatening the profits of exporters from Toyota Motor Corp. to Sony Corp. just as global growth slows.

“The headline number is better than expected, but it’s not like this is a strong number,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. “The strengthening yen will start to weigh on exports and capital spending. We can expect positive growth in the third quarter, but the yen may damp that momentum.”

Japan’s benchmark Nikkei 225 (NKY) Stock Average rose 1.4 percent to 9,086.41 at the 3 p.m. close in Tokyo. The yen traded at 76.89 per dollar and has gained 5 percent against the U.S. currency in the past three months. Authorities sold the yen for the first time since March this month as it approached a high of 76.25.

“The yen may appreciate further, beyond 75” Sakakibara said in an interview with Bloomberg Television today. “I would expect the U.S. economy to be fairly weak for a long period of time.”

Mr. Yen

Sakakibara became known as “Mr. Yen” during his 1997-1999 tenure as the Finance Ministry’s top currency official because of his efforts to influence the yen rate through verbal and actual intervention in foreign-exchange markets.

Capital investment rose 0.2 percent, compared with a revised 1.4 percent decline in the first quarter, today’s data showed. Public investment increased 3 percent, the first advance in six quarters, reflecting government rebuilding efforts, the report showed.

Toyota, the world’s biggest carmaker, expects to begin making up for lost output from the earthquake in September, one month earlier than previously announced, it said on Aug. 2. The company is hiring up to 4,000 temporary workers to help that effort.

‘Blown Off’

A 15-yen change in the dollar-yen rate over the past year has “blown off” 300,000 yen, or $3,900, in profit on a $20,000 car, and a stronger yen has cut Toyota’s fiscal first-quarter operating profit by 50 billion yen, Takahiko Ijichi, the carmaker’s senior managing officer, said on Aug. 2.

A stronger currency makes Japanese products less competitive abroad and erodes overseas profits repatriated into yen. The yen has been stronger than the 82.59 average rate on which companies have based their profit forecasts, according to a quarterly Bank of Japan survey of business activity.

“The exchange rate is at a level that has an extremely damaging effect on the Japanese economy,” Osamu Masuko, president of Tokyo-based Mitsubishi Motors Corp., said Aug. 4 after authorities intervened in the foreign-exchange market for the first time since March. “The resulting exchange rate still isn’t acceptable.”

Slower overseas growth may also weigh on demand for Japanese products. Tokyo Electron Ltd., the world’s second- largest maker of semiconductor equipment, cut its net income forecast for the year ending in March by 49 percent to 34 billion yen ($442 million), citing lower than expected sales.

Global Growth Slows

France’s GDP stalled in the second quarter while the economies of both Hong Kong and Singapore shrank, reports this month have shown.

“Growth is going to be weak if we have the supply side constraints from the power side coupled with demand side problems, from foreign growth and a slow fiscal response,” said Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co.

Consumer spending fell 0.1 percent in the April-June period from the previous three months, compared with a 0.6 percent drop in the first quarter, today’s report showed. Net exports, or shipments less imports, subtracted 0.8 percentage point from GDP, the biggest drop since the first quarter of 2009.

Reconstruction Budget

Policy makers are beginning to work on a third package for earthquake relief that Chief Cabinet Secretary Yukio Edano says may include measures to help businesses combat the strong yen. Prime Minister Naoto Kan has passed two budgets totaling 6 trillion yen to clear debris and build temporary homes in the disaster-hit northeast.

The government downgraded its growth forecast for Japan last week, saying GDP will increase 0.5 percent in the year started April, compared with its January forecast for a 1.5 percent expansion. The changes reflect the March earthquake’s impact on output and consumer spending, the Cabinet Office said.

Most indicators from the quarter started July 1 point to an economic rebound, with industrial production rising for three straight months since plunging in March. Companies are also forecasting they will boost output this month to make up for lost capacity resulting from the natural disaster, and sentiment among merchants exceeded pre-temblor levels.

“The monthly data show that supply constraints are gradually easing and sentiment has bottomed out as well,” Economic and Fiscal Policy Minister Kaoru Yosano told reporters today in Tokyo. “With the steady recovery of supply chains and a certain increase in reconstruction demand, we expect considerably high growth in the second half of this year.”

Machinery orders, a leading indicator for capital spending, also rose more than expected in June, a sign companies will ramp up outlays as they restore their businesses.

“We’ll see considerably high growth in the third quarter even though the yen will start to temper that figure,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Aki Ito in Tokyo at aito16@bloomberg.net

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

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