TOKYO Aug 14 Japan's economy is expected to
rebound this quarter 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 4 percent for
the three months to September after data on Wednesday showed
that an April sales tax hike pushed the world's third-biggest
economy into a 6.8 percent drop in the second quarter.
The worst decline since the 2011 earthquake and tsunami
highlights the growing gap between the bullish Bank of Japan and
sceptical financial markets, even though it did not derail the
BOJ and government scenario that the economy is recovering
moderately and will not push the central bank into immediate
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 1.0 percent for the fiscal year through
March, well above the 0.3-0.5 percent expectations of private
economists. None of the analysts in Reuters surveys over recent
months, moreover, expect the BOJ will reach its goal of 2
percent inflation next fiscal year.
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 -
Many economists, such as Muguruma, expect the central bank
will have to cut its GDP forecast in a half-yearly assessment on
Oct. 31, 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
The second quarter's contraction more than erased a
January-March surge of 6.1 percent in a spending spree ahead of
the April 1 increase in the sales tax to 8 percent from 5
Averaging the two quarters, the economy grew at better than
a 2 percent 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
Morita does not expect a BOJ easing anytime soon, even if
the central bank cuts its economic forecast. The BOJ will remain
bullish on inflation, he said, as it focuses on economic growth
catching up with its longer-term potential. Kuroda has said this
output gap has essentially disappeared.
MORE THAN TAX HIKE PAIN
Still, obstacles to recovery remain.
Machinery orders, an indicator of companies' plans for
investment in plant and equipment, fell the most in the second
quarter since the last global financial crisis, government data
showed Thursday, with only a modest rebound forecast for this
The first drop in orders in five quarters, capped by an
unexpectedly weak June bounce, casts doubt on policymakers'
hopes that business investment will help drive the recovery.
Exports, which the BOJ was counting on to bolster the
economy through the tax-induced consumption decline, have fallen
unexpectedly for two months in a row. Some BOJ officials warn
that exports may not grow much as many Japanese companies have
shifted production overseas, and demand in emerging Asian
markets lacks vigour.
Japan's industrial production in June posted its worst drop
since 2011 in June, and Wednesday's GDP data showed a worrying
overhang in inventories, which could weigh on the expected
rebound in factory output.
There are also signs the slump in consumption may be
prolonged. Households may be holding back on spending not just
because of the temporary pinch from the tax hike but also
because wages are not keeping up with inflation.
Households had been expected to cut spending on big-ticket
items in the second quarter, but the data showed they also cut
back on semi-durable goods and even groceries and other daily
Employee compensation fell 1.8 percent in the quarter from
the previous three months in inflation-adjusted terms, clouding
expectations that rising wages and income will support
"Because consumption fell so much last quarter, the rebound
in the current quarter will seem strong because of a low base of
comparison," said Norio Miyagawa, senior economist at Mizuho
Securities Research and Consulting.
"However, the underlying trend is not that strong," he said.
"The decline in real wages in the second quarter was quite big,
and spending on non-durable goods was weak. This is more than
just a pullback after the sales tax hike."
(Additional reporting by Stanley White and Tetsushi Kajimoto;
Editing by William Mallard and Eric Meijer)