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Japan's Economy Shows Signs of Recovery

Its gross domestic product grows at a 2.3% annual rate. But analysts warn recovery could be skin-deep.

August 12, 2003|Yuri Kageyama | Associated Press

TOKYO — Japan's economy expanded for the sixth straight quarter, growing 0.6% in the three months through June, but analysts warned against too much optimism about the weak recovery gaining more momentum.

Cabinet Office data released today for the gross domestic product -- the value of a nation's goods and services -- partly hinged on one-time factors such as a drop in overseas travel and a rise in cigarette buying, which helped the world's second-largest economy record growth that translated to an annual rate of 2.3%.

Peter Morgan, chief economist at HSBC Securities Japan in Tokyo, said the rebound could just be skin-deep.

"It's easy to exaggerate," he said. "The numbers certainly look good on the surface."

Nevertheless, the data brightened sentiments on the Tokyo stock market, lifting its main index up more than 1% in trading this morning.

"Personally, the result was a little better than I expected," said economy and banking minister Heizo Takenaka, adding that Japan had weathered uncertainties such as the war in Iraq. "The economy is normalizing."

But Yoshihiko Senoo of the Cabinet Office said special factors were largely behind the positive results. Japanese consumers rushed out to buy cigarettes before taxes went up nearly 1 cent a cigarette on July 1, inflating consumer spending, he said. And worries about the severe acute respiratory syndrome outbreak in Asia curtailed travel out of Japan, pushing down imports and helping boost growth figures.

Private sector demand rose 0.6%, with corporate investments, excluding housing, edging up 1.3%. Household consumption was up 0.3% as demand for TVs, DVD recorders and digital cameras remained strong. Public sector demand, however, fell 0.5%.

One stumbling block for Japan's growth is deflation, a fall in prices that indicates the economy is shrinking, reducing jobs, eroding profits and dwindling paychecks. Stuck in a long slowdown, Japan is the only major economy in the world mired in deflation.

Tuesday's economic data showed that declining prices, particularly in computer products and parts, continue to plague Japan.

Growth eked out over the last year had been gradually fading quarter by quarter.

In the January-March quarter, the economy grew 0.3% from the previous quarter. In the October-December quarter 2002, it grew 0.5%, and for the July-September quarter, it grew 0.7%.

For the fiscal year ended March 31, Japan's economy grew 1.6%, after contracting 1.2% in fiscal 2001. The government is targeting 0.6% growth for fiscal 2003.

As Japan loses jobs in manufacturing and construction, the main industries that propelled modernization for decades, companies are struggling to switch strategies and cut costs.

The unemployment rate has hovered at near-record highs for months.

The nation's banks are still battling mounds of bad loans, estimated at $295 billion.

"It's too early to tell," Takeshi Minami, senior economist at UFJ Tsubasa Securities Co., said of Japan's outlook. "The key is whether the positive numbers hold up."

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