Correction: Japan Emerges From Recession In Q2

Correction: In the earlier version it was incorrectly mentioned in the second paragraph that the annualized growth was the first after five quarters of decline. This is the corrected version.

The Japanese economy pulled out of its worst recession since World War II in the second quarter on government stimulus measures and strong exports.

Monday, the Cabinet Office said real gross domestic product expanded 3.7% on an annualized basis during the three months to June, after shrinking for four straight quarters. However, the annualized growth was smaller than the 3.9% increase expected by economists, following a revised decline of 11.7% in the first quarter.

Compared to the previous quarter, the second largest economy grew 0.9% versus a 3.1% fall in the prior quarter. Economists had expected a sequential rise of 1%. The quarterly growth was also the first rise in five quarters.

Exports surged by a sequential 6.3% in the second quarter. Private consumption increased 0.8%, while government consumption was down 0.3%. At the same time, business investment dropped 4.3% and housing investment dipped 9.5%.

The GDP deflator climbed 0.5%, slower than the 0.9% growth in the prior quarter. The slowdown in growth was unexpected as economists were looking for an increase 1.8%.

Asian economies are apparently emerging strongly from the recession. China’s economy grew at a faster pace in the second quarter after rising at the slowest pace on record in the first quarter. Other Asian economies like Hong Kong and Singapore also emerged out of recession in the second quarter.

The biggest Eurozone economies like Germany and France also rebounded during the period.

Last week, the Bank of Japan and the Cabinet Office left its economic assessment unchanged after upgrading it for three consecutive months.

BoJ Governor, Masaaki Shirakawa said he do not see a risk of a deflationary spiral now. That said, he added that an impressive recovery is unlikely in Japan. It is uncertain how final demand will respond to policy measures and inventory adjustments and the recovery might not be so drastic.

Commenting on the latest data, Dresdner Bank economist Wolfgang Leim said Japan’s economy is back on a growth track and there are signs of robust export growth in the third quarter. Stronger foreign trade and the public sector investment programme should ensure steady progress in the second half of the year. But, general outlook for domestic demand is far from bright. In response to poor earnings, the corporate sector is still scaling down their production capacities and holding back investment.

Accordingly, the downward pressure on wages and employment levels has mounted, the economist said. Once the stimulus measures taper off in the second half, consumption is expected to slow down considerably. Thus, the recovery is still in a fragile state.