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JAPAN'S economy pulled out of its longest recession of the postwar period during the second quarter of this year, growing by 0.9 per cent over the preceding three months or at an annual rate of 3.7 per cent. But the recovery was somewhat weaker than expected and was driven mainly by government stimulus and by an improvement in exports that analysts said might not last.
The fact that real gross domestic product (GDP) expanded for the first time in five consecutive quarters failed to offset the negative impact on market sentiment of renewed weakness in US economic data and the Tokyo stock market fell in sympathy with other Asian markets.
The Nikkei 225 average dropped 3 per cent, or 328.72 points, to 10,268.61.
How real the improvement is in the world's second largest economy is the subject of disagreement among policymakers and economists. Economics Minister Yoshimasa Hayashi said yesterday that 'conditions are still severe but Japan's economy is expected to pick up'. But the Bank of Japan has said only that 'conditions have ceased to worsen'.
And, as chief economist Richard Jerram at Macquarie Securities in Tokyo pointed out, the fact that Japan's economy has slid back into deflation means that GDP growth is being boosted artificially. Normally 'real' (or inflation-adjusted) GDP is lower than nominal growth; in Japan's case falling prices are actually pushing up real GDP.
Private consumption rose by 3.1 per cent in the second quarter, while public investment jumped by a sharp 36 per cent - offsetting the negative impact of a drop in corporate capital investment and in housing. But this was a result of government fiscal and monetary stimulus rather than a spontaneous rise in domestic demand, analysts said.
Net exports (exports minus imports) was the swing factor that made possible the second quarter GDP recovery but the improvement in overseas demand for Japanese goods is largely due to inventory adjustment and may not last, some economists say.
They point to the fact that latest data show consumer spending in the key US market to be weak still .
The latest GDP data 'reflects an increase in exports, as well as a rise in consumption and public investment thanks to economic stimulus measures', said Kyohei Morita, chief economist at Barclays Capital, Japan. 'But (these) were driven by stimulus steps in Japan and overseas, and Japan's economic growth is far from self-sustaining.'
Economists said that Japan's GDP growth in the July-September quarter is likely to be similar to that in the second quarter of the year but that the pace of growth is expected to slow down after that as the effects of government stimulus wear off.
Attention is focused now on the outcome of the Aug 30 general election to the lower house of parliament in which the main opposition Democratic Party is expected to seize power and to oust Prime Minister Taro Aso's Liberal Democratic Party which has been in power almost uninterrupted for more than 50 years.
'If a Democratic Party-led government takes power, the focus will be on how the party funds its policies,' said senior economist Yasuo Yamamoto at Mizuho Research Institute in Tokyo. 'If it is perceived to be considering an issuance of government bonds, interest rates could rise and possibly push down demand.'
But the DPJ has claimed that it can finance family allowances and other measures to boost consumer spending by means of cutting waste from current government budgets and by tapping into 'special accounts' that the government controls.
These special accounts amount to some 300 trillion yen (S$4.6 trillion) in total, Shizuka Kamei, acting leader of the People's New Party, told the Foreign Correspondents Club yesterday. Along with the Social Democrat Party, Mr Kamei's party had pledged to cooperate with a DPJ-led government after the Aug 30 election.
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