August 6, 2008 / 7:44 AM / 12 years ago

UPDATE 2-Japan data shows economic expansion may be over

(For more stories on the Japanese economy, click [ID:nECONJP]) (Adds more background)

By Yuzo Saeki

TOKYO, Aug 6 (Reuters) - Japan’s longest post-war economic expansion may be over, government figures showed on Wednesday, as an index of indicators including industrial output and corporate profits sank in June. [JPCIIN=ECI]

The data reinforced the market view that the Bank of Japan is likely to sit tight on monetary policy for the rest of the year in view of a global economic slowdown and high energy costs.

“The coincident index underscored the possibility that the economy peaked in the final quarter of last year and may have entered a recession in the economic cycle,” said Junko Nishioka, economist at the Royal Bank of Scotland.

The Cabinet Office said the economy was “deteriorating”, adding that this was a provisional judgment that the economy is likely in a recession.

Tokyo defines a recession as the period between the peak and trough of the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.

A downturn has been widely expected as overseas demand, an engine of growth for the export-oriented country, has lost steam as the U.S. subprime problems spread to the global economy and rising raw material prices erode corporate profits and dampen consumer sentiment.

The index of coincident economic indicators fell 1.6 points to a preliminary 101.7 in June, the government said [JPCIIN=ECI]

The coincident index comprises data including industrial production, retail sales and companies’ operating profits.

The index of leading economic indicators fell 1.7 points to a preliminary 91.2 in June from 92.9 in May.

Weak industrial output in June was a key reason behind the decline in the indexes. Output fell 2.0 percent in June from May, and April-June marked the second straight quarter of decline.

The decline in output reflected slowing exports, which marked their first year-on-year decline in nearly five years in June, and flagging consumer spending amid rising prices. [ID:nT22777]

Japan’s retail regular gasoline prices hit a record high this week as oil refiners’ moved to raise wholesale prices to pass on higher crude import costs. [ID:nTKG002979]

DATING THE DOWNTURN

Many economists say Japan’s economic cycle likely entered a downward phase late last year or early this year after enjoying its longest postwar expansion since early 2002.

“Japan’s economy most likely peaked in October-December last year and has entered a recession in its economic cycle,” said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute. “The question now is how long and deep the downturn will be.”

Economics Minister Kaoru Yosano said last week that the economic cycle may have turned south late last year. [ID:nT244622]

The Cabinet Office, which compiles the index, said in June that data suggested the economy may have experienced a change in phase after its longest postwar expansion cycle.

The change in the Cabinet Office’s view adds to the possibility that the government may cut its assessment of the economy in its monthly economic report on Thursday.

The Nikkei business daily said on Tuesday that the government was likely to say that economic activity has recently been weak, lowering from the view last month that a recovery was pausing and weak moves were seen recently.

The country’s gross domestic product is also seen to have contracted in April-June after three straight quarters of growth, according to a Reuters’ poll conducted last week.[ID:nT205687]

Economists forecast that the economy shrank 0.6 percent, or an annualised 2.3 percent, in the April-June quarter due mainly to crumbling exports and consumption.

They also said the outlook remained gloomy in the face of high energy costs and a global slowdown, although the trough is likely to be shallow. The preliminary GDP data for April-June is due out on Aug. 13. (Editing by Hugh Lawson)

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