Japan's economy shrank last quarter, top forecaster says

The Japanese economy likely contracted last quarter, dragged down by weak consumer spending and a slump in exports.
The Japanese economy likely contracted last quarter, dragged down by weak consumer spending and a slump in exports.PHOTO: BLOOMBERG

TOKYO (BLOOMBERG) - The Japanese economy likely contracted last quarter, dragged down by weak consumer spending and a slump in exports, according to a top forecaster.

The world's third-biggest economy may have shrunk as much as an annualised 2.5 per cent, said Yoshiki Shinke of Dai-ichi Life Research Institute. The median estimate of 25 economists surveyed from July 9 to 22 by Bloomberg is for 0.8 per cent growth after the 3.9 per cent expansion in the first quarter.

"There is no doubt Japan's economy is in a soft patch," said Shinke, the only economist to make the Japan Center for Economic Research's top-five list of forecasters for the past six years. "The question isn't whether the economy contracted but how deep the contraction was."

The warning highlights growing caution about resilience of Japan's recovery, with industrial production dropping in three of the four months through May, and exports falling in the second quarter the most since late 2012, according to Bank of Japan data.

The weakness won't persist this quarter, Governor Haruhiko Kuroda said on July 15, predicting a moderate recovery will continue. The strength of the rebound will be "critical" to judge whether the central bank's upbeat view on the economy will prevail, said Mr Shinke.

The Cabinet Office will release the second-quarter gross domestic product figures on Aug. 17.

Mr Shinke isn't alone in sounding caution. Economists at JPMorgan Chase & Co., Barclays and Deutsche Bank are among those who see a second-quarter contraction, with BNP Paribas estimating the economy may have shrank more than 1 percent.

The BOJ's preferred measure is forecast to show inflation vanishing again in June after readings of zero in February and April, according to a survey of economists by Bloomberg. The data will be released on July 31.

The effects of the decline in oil prices on inflation will be largest this summer, cutting about 1 percentage point off consumer price inflation, BOJ Deputy Governor Hiroshi Nakaso said in a speech in Kumamoto, western Japan on Monday.

Mr Kuroda is counting on the economy to grow at a faster pace than its potential, intensifying supply constraints and stoking inflation.

Any sharp contraction could make it harder to reach the central bank's 2 per cent inflation target "at the earliest time possible."

While the economy is likely to bounce back this quarter, the uncertainty is "very high," said Mr Shinke. It's not clear that the slowdown in China - Japan's biggest trading partner - is over, while wages may not rise enough to drive consumer spending, he said.

"I see a good chance that the BOJ has to ease more this year, probably in October," Mr Shinke said. "It's very clear that the recovery has been much weaker than what the BOJ has predicted so far."

The central bank on July 15 trimmed its growth forecast for the year until March 2016 to 1.7 per cent from 2 per cent, while keeping its projection that inflation will reach its 2 per cent goal around the six months until September next year.