Japan Contraction Risk Rises on Faltering Global Demand: Economy

Aug. 27 (Bloomberg) -- Japan’s risk of an economic contraction this quarter has increased as faltering demand from Europe to China drags down exports, strengthening the case for more government measures to support growth.

JPMorgan Securities Japan Co. forecasts a 0.3 percent annualized decline in gross domestic product in the three months through September after previously seeing 1 percent growth. BNP Paribas SA estimates a 0.9 percent fall after earlier predicting no change.

China’s failure to secure an economic rebound is adding to austerity measures in Europe and unemployment in the U.S. in limiting prospects for Japanese trade and growth. Pressure may build for an extra government budget and additional stimulus from the Bank of Japan as subsidies for purchases of fuel- efficient cars wind down, damping consumer spending.

“We’ve revised down our forecast because the global economy is looking weaker than we anticipated,” said Ryutaro Kono, chief Japan economist at BNP and a former government nominee for the central bank board. “We expected a gradual rebound for the emerging economies but the recent data aren’t signaling it. Europe continues to slump and exports to the U.S. also are slowing.”

Japan will downgrade its assessment of the domestic economy for the first time in 10 months in a report to the cabinet tomorrow, according to the Nikkei newspaper. The nation had a wider-than-estimated trade deficit in July as shipments to the European Union fell 25 percent from a year earlier and those to China slid 12 percent.

Stocks, Yen

The MSCI Asia Pacific Index fell 0.4 percent as of 5:36 p.m. in Tokyo after Chinese firms reported profit declines.

“Chronic” upward pressure on the yen is placing downward pressure on Japan’s economy, central bank Governor Masaaki Shirakawa said Aug. 24. Gains in the currency erode the sales and profits of exporters such as Nissan Motor Co. (7201) The yen traded at 78.71 per dollar as of 5:37 p.m. in Tokyo.

For now, the economists forecasting a contraction this quarter are in a minority. The median of 27 forecasts compiled by Bloomberg News this month was for a 1 percent expansion. Besides BNP and JPMorgan Securities Japan, those now seeing a decline include Bank of America Merrill Lynch and Credit Suisse Group AG. Growth was 1.4 percent in the second quarter.

Mitsubishi Research Institute, the best forecaster of Japan’s GDP in the past two years according to Bloomberg data, sees a 0.2 percent expansion in the third quarter and a 0.7 percent gain in the fourth quarter, with earthquake reconstruction work playing a role.

Avoiding Recession

“Exports are slowing more than we thought,” said Akihiro Morishige, an economist at Mitsubishi Research. “However, Japan will probably be able to avoid a recession because the reconstruction demand continues to support the recovery.”

Second-quarter figures for gross domestic product showed that consumption rose the least since households cut spending in the immediate aftermath of the March 2011 earthquake.

“Without a smooth baton pass from domestic demand to external demand, the Japanese economy may get into serious trouble,” said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo and a former central bank official. “There is high possibility that not only the Bank of Japan (8301) but also the government will need to introduce stimulus measures.”

Chinese Premier Wen Jiabao said his nation needs to do more to support exports, the official Xinhua News Agency reported Aug. 25. China’s industrial companies’ profits dropped for a fourth month in July, the government said today. German business confidence fell for a fourth month in August, a report showed today, and South Korean consumer sentiment slipped to the lowest level in seven months.

Export Weakness

Weakness in Chinese manufacturing has dashed hopes for a quick, strong recovery in Japan’s exports in coming months, Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. in Tokyo and a former BOJ official, wrote in a report. “The odds are rising that real exports will contract in the third quarter.”

Meanwhile, most of the 300 billion yen ($3.8 billion) budgeted by the government for car subsidies has been spent.

“Car sales will likely decline as the boosts from the government’s subsidy program fade out,” said Takashi Shiono, an economist at Credit Suisse Group AG in Tokyo. “The adjustments in consumption will be the biggest drag on Japan’s economy” in the third and fourth quarters, Shiono said.

Shiono said a 2 trillion yen extra budget is possible by year end, including measures to spur investment in green technology and agriculture, and subsidies for environmentally- friendly housing.

To contact the reporter 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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