TOKYO - Japan's economy contracted in the second quarter, as expected, reinforcing views that the world's No 2 economy has slipped into recession after its longest expansion since World War Two.
Private consumption, which accounts for some 55 per cent of GDP, fell 0.5 per cent from the previous quarterCrumbling exports, weak consumption and declines in public and private investment spending led to 0.6 per cent contraction, the first fall in a year, as high energy and raw material costs bite and the impact of a US slowdown spread to emerging nations.
'The data gave an impression that the economy has entered a recession and I think it is in a recession,' said Takahide Kiuchi, chief economist at Nomura Securities.
Economists are divided on whether the economy will shrink further in the current quarter - matching a widely used definition of a recession - but they agree that any return to growth will be soft and depend heavily on the direction of oil prices and how quickly a global slowdown ends.
'There are still some possibilities that GDP will return to a positive territory in the July-September quarter, but the downturn trend is likely to continue,' said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.
Yields on five-year Japanese government bonds fell to a four-month low below 1 per cent as weak GDP reaffirmed expectations that the Bank of Japan would keep interest rates on hold for several months.
Many economists and government officials say Japan is either falling into a recession or is already in one, ending a growth cycle that began in early 2002, the longest in six decades.
Japan measures a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.
The annnualised contraction of 2.4 per cent in Japan compared with 1.9 per cent annual growth in the same quarter in the United States, where government stimulus supported the economy.
No rate move for a while
Many economists say the Japanese economy is in much better shape than when it went through slumps in 1998 or 2001, with companies having cleaned up their balance sheets after the collapse of an asset bubble in the 1990s.
Economics Minister Kaoru Yosano said that the economy was weakening, hurt mainly by external factors such as high oil prices, but added that it won't keep falling.
'Even though the economy contracted in April-June, it would be more accurate to think that it won't last long.'
Caught between gloom and rising grocery prices in an economy where deflation was common for most of the past decade, the Bank of Japan has been expected to keep the key interest rates at an already low 0.5 per cent for a while, and the quarterly contraction did not change that view.
'We can't expect export growth to accelerate any time soon, so the economy will remain in an adjustment phase for the rest of this year,' said Takumi Tsunoda, a senior economist at Shinkin Central Bank Research.
'But we can probably avoid a full-fledged recession, as in several straight quarters of GDP contraction. We still expect the Bank of Japan's next policy move to be a rate hike, but it won't come for the rest of this year.'
Private consumption, which accounts for some 55 per cent of Japan's economy, fell 0.5 per cent in the second quarter, after recent rises in food and gasoline prices hurt consumer sentiment and weak wages prompted shoppers to keep their purses tightly closed. That was the first drop in almost two years.
Another culprit in the downturn is weakening exports.
Shipments to the United States have already faltered, and now those to emerging Asia have begun to sputter after maintaining growth through the first year of the global credit crisis.
Corporate capital spending, another driver of Japan's growth in recent years, fell 0.2 per cent, marking a second straight quarter of decline. -- REUTERS
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