Japan aims to bounce back but obstacles to recovery remain
JAPAN'S economy is expected to rebound over the coming months from a steep contraction, but looming challenges will keep the pressure on the Government and central bank for action to sustain growth.
Economists expect annualised growth of about 4pc for the three months to September after data showed that a sales tax hike imposed in April pushed the world's third- biggest economy into a 6.8pc drop in the second quarter.
The worst decline since the 2011 earthquake and tsunami highlights the growing gap between the bullish Bank of Japan (BOJ) and sceptical financial markets, even though it did not derail the BOJ and the government's scenario that the economy is recovering moderately and will not push the central bank into immediate action.
With exports disappointingly weak, inventories building, consumption sluggish and capital spending in question, the central bank may find it harder to argue that its massive stimulus will pull Japan out of 15 years of deflation.
Pressure could also build on Prime Minister Shinzo Abe in coming months to veto a planned further tax hike.
"We can't ignore the effect the big economic contraction in April-June has on the BOJ's economic and price projections," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
Even after trimming its forecasts last month, the BOJ expects expansion of 1pc for the fiscal year through March, well above the 0.3-0.5pc expectations of private economists.
BOJ Governor Haruhiko Kuroda has been relentlessly bullish, sticking to his inflation target last week on the grounds that a positive cycle - strong corporate profits boosting business investment and wages, thereby supporting personal spending - remains intact.
Many economists, such as Muguruma, expect the central bank will have to cut its GDP forecast in a half-yearly assessment at the end of October, nudging it into expanding its enormous purchases of government bonds and other assets. Others believe the BOJ will not be forced into action given that labour markets are tightening and business sentiment is holding up.
The second quarter's contraction more than erased a January-March surge of 6.1pc head of the April 1 increase in the sales tax to 8pc from 5pc.
Averaging the two quarters, the economy grew at better than a 2pc annual rate in the first half.
"Public-works spending will support growth, while rising summer bonuses will underpin household spending," said Kyohei Morita, chief economist at Barclays Capital Japan.
"Our main scenario is for the economy to stage a substantial rebound in July-September," Mr Morita.
Still, obstacles to recovery remain. Machinery orders, an indicator of companies' plans for investment in plant and equipment, fell in the second quarter, while exports have fallen unexpectedly for two months in a row. (Reuters)