Japan Economy Flashes Warning as Inventory Gain Holds Up GDP

Updated on
  • Consumer spending fell, and exports slid amid China slowdown
  • Weakness raises odds of government spending package: economist

Japan’s economy contracted last quarter less than initially estimated, thanks to a buildup in inventories that risks damping a rebound.

Gross domestic product shrank at an annualized 1.2 percent pace in the three months through June from the first quarter, less than the 1.6 percent drop reported last month, the Cabinet Office said on Tuesday in Tokyo. Economists had estimated a 1.8 percent contraction.

Businesses reduced investment more than first estimated, in a rebuff to Prime Minister Shinzo Abe’s call for Japanese companies to deploy their record cash holdings and a surge in profits into capital spending. Also dragging on the economy was consumption -- even after an advance in wages. Overseas, Japan is facing growing risks from a slowdown in China, its biggest trading partner.

"Companies are still struggling to reduce stockpiles in the face of weak demand at home and abroad," said Junichi Makino, an economist at SMBC Nikko Securities Inc. "The government will probably compile about 2.5 trillion yen worth of stimulus in an economic package around October," he predicted. That’s $21 billion.

Today’s report showed:
* Private inventories added 0.3 percentage point to quarterly GDP, more than the 0.1 point initially estimated
* Private consumption subtracted 0.4 percentage point from GDP
* Net trade took off 0.3 percentage point
* Capital spending shaved 0.1 percentage point
* Government spending and residential housing added to GDP

Japan’s economy entered the third quarter lacking momentum, according to recent data. While retail sales rose for a fourth straight month in July, industrial output and household spending unexpectedly fell.

Also worrying for reflationists, today’s report showed a retreat in the GDP deflator, which is a broad measure of inflation across the economy. This gauge was falling through much of the 1990s and 2000s as Japan stagnated. It turned up last year as Bank of Japan monetary easing sent the yen tumbling and prices rising. Now, it’s slowing again:

Monthly inflation data have also slowed, to zero percent in July when looking at consumer prices excluding fresh food, one of the BOJ’s main measures. Central bank officials are becoming less confident about Japan’s underlying economic strength, making them cautious about the outlook for a pickup in inflation, people familiar with the discussions have said this month.

With the BOJ’s 2 percent inflation target distant, the most recent data
contrast with a shift among some economists toward the view that the central
bank won’t step up its asset purchases.

Advisers to Abe have raised the possibility of extra stimulus. Etsuro Honda called for a fiscal boost of as much as 3.5 trillion yen while Koichi Hamada said further monetary easing and fiscal steps will be needed if the economy fails to grow this quarter.

Even so, Economy Minister Akira Amari said on Sept. 1 that the government isn’t seeking any urgent budgetary support for now. BOJ Governor Haruhiko Kuroda in New York last month that the central bank can achieve its 2 percent inflation target with the current level of monetary stimulus.

Today, Chief Cabinet Secretary Yoshihide Suga said the Abe administration would do its utmost to foster a strong economy. There’s work to do for Japan to catch up with its biggest developed counterparts, which have outpaced it since the global recovery began in 2010: