Business

Thursday May 21, 2009

Record 4% Q1 contraction for Japan


TOKYO: Japan’s economy suffered a record contraction in the first quarter, but economists expect some feeble growth ahead in tune with growing optimism that the worst global recession in more than six decades is subsiding.

The world’s No. 2 economy shrank 4% in January-March, hit by tumbling exports and investment, data showed yesterday.

But early signs of some pick-up in industrial production and exports, as well as the government’s US$154bil stimulus spending in the pipeline, convinced economists that Japan can eke out modest growth in the coming quarters after a deep, year-long recession.

That would mean Japan would return to growth sooner than the United States and euro zone economies, which shrank more than expected in the first quarter, though not as much as Japan, the hardest hit by the collapse in global demand and trade.

Despite brighter near-term prospects, the longer-term outlook remains murky, with the pain long felt by Japanese exporters only now starting to spread through the domestic economy and a sustainable recovery dependent on a lasting upturn in global demand for Japanese goods.

“Weaker-than-expected figures for capex and private consumption suggest the negative impact from the export plunge is spreading to domestic demand,” said Hiroshi Shiraishi, economist at BNP Paribas. “As such, the Japanese economy may return to growth temporarily, but it could suffer a contraction again afterwards.”

The first-quarter slump was slightly smaller than economists’ 4.2% forecast, but followed a downward revision, to 3.8%, for the fourth-quarter decline. That compares to 2.5% euro zone contraction and a 1.6% decline in the United States.

Guarded optimism about the future, fuelled in part by improving sentiment indicators, combined with grim data highlighting the damage wrought by the world financial crisis on the Japanese economy, follows a familiar pattern of recent weeks.

Reminders that the economy will be crawling back from a very deep hole and the road to recovery will be long and bumpy have kept stock markets hovering near peaks scaled after a three-month rally, but unwilling to push much higher.

German investors and analysts grew much more optimistic in May that economic conditions will be brighter later this year, although they were unexpectedly downbeat about how bad things are right now.

In a sign that the battered banking sector may finally be emerging from crisis mode, several major banks were seeking permission to repay billions of dollars they borrowed from the government. JPMorgan Chase & Co expects repayments to begin within the next couple of weeks.

Providing another potential boost to banks, the US Federal Reserve widened its safety net for the downtrodden commercial property sector by making older loans eligible for an emergency programme set up to revive dormant credit markets.

But a report showing US housing starts and permits fell to record lows in April revived concerns about the health of the US real estate market, which touched off the financial crisis in 2007 when complex securities tied to mortgages turned sour.

Even China, widely seen as most advanced on the road to recovery among major economies, is not quite on solid ground yet, a senior World Bank official warned yesterday.

David Dollar, head of the World Bank’s office in China, said market enthusiasm about the upturn in the world’s third-largest economy was premature and it still needed a revival in private investment to cement a full recovery.

World Bank president Robert Zoellick, speaking on Spanish television, said financial markets were showing signs of recovery and the pace of contraction in global output appeared to be easing.

But he tempered the rising optimism by saying: “It’s not enough to focus on markets. If we don’t look at unused capacity in the global economy, recovery will be slower.” — Reuters

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