Japan Contracts in Q2
I see no reasons to mince my words on this one with the recent stark downward revision of Japanese GDP in Q2.
(From Bloomberg)
Japan's economy contracted at almost twice the pace forecast by analysts in the second quarter, reinforcing speculation the central bank will leave interest rates unchanged this year.
The economy shrank at a 1.2 percent annual rate in the three months ended June 30 as business spending slumped, the Cabinet Office said in Tokyo today. The government initially forecast a 0.5 percent expansion.
Bond yields fell to the lowest level since February last year on expectations the central bank will keep its overnight lending rate at 0.5 percent to prevent the economy from falling into recession. Any rebound in growth depends on the severity of the housing slowdown in the U.S., the biggest export market for Japanese companies including Toyota Motor Corp. and Sony Corp.
``A move by the Bank of Japan is out of the question,'' said Takehiro Sato, chief economist at Morgan Stanley Securities Japan Ltd. in Tokyo. ``A cloud is hanging over the domestic and global economy.''
And for the graphical version ...
For a general assesment of the current economic situation I recommend you to re-visit my recent notes.
Japan - The Fundamentals Linger
Is Japan Heading for a Recession? (GEM note)
As for the immediate outlook in Japan it clearly seems evident now that whatever plans the BOJ might have had to continue normalization must now be shelved. Regarding the general annual growth estimate the current Q2 numbers will obviously weigh negatively in the overall balance. I will however be looking for somewhat of a recovery in Q3 relative to the curren q-o-q -0.3% contraction. The key as is also mirrored in the Q2 figures' steep downward revision of corporate capex will clearly be to what extent business investment will recover. As I argued in my recent GEM note (see link above) a downside has opened below industrial production especially if the US economy continues to linger in the subprime mess; something which seems very plausible at this point. In short, no de-coupling I think. Domestic consumption will likely continue to stay in positive territory but as always with Japan the positive contribution will be most modest. In the end Japan could very well be looking at a H2 which on a q-o-q basis will fair very close to stagnation.