Japan's economy returned to growth in the second quarter, ending its longest recession since World War Two, but analysts warned of a rocky road ahead as the nascent recovery was based on short-term stimulus efforts around the world.
Growth in the world's second biggest economy is likely to continue in coming quarters as companies restock inventories due to exports and government stimulus spending around the world, providing further evidence that the worst of the damage wrought by a global financial crisis may be over.
But economists and policymakers were wary about the outlook for next year because exports, the biggest contributor to growth in April-June, may slow as stimulus measures in other countries wear off.
A deteriorating jobs market is also likely to undermine Japanese consumer spending after government subsidies on energy-efficient cars and home appliances expire. This could delay a recovery in capital expenditure, economists say.
Gross domestic product grew 0.9 per cent in April-June, slightly short of a median market forecast of a 1 per cent increase. That puts Japan in the first camp of G7 countries that have pulled out of recession, along with Germany and France.
That compared with a 0.3 per cent contraction in the United States in the same quarter. The euro zone economy shrank 0.1 pe cent after a 2.5 per cent fall in the first three months.
Japan's economy expanded for the first time in five quarters, following a revised 3.1 per cent contraction in January-March and a 3.5 per cent decrease in the final quarter of 2008 -- the biggest drop on record.
On an annualised basis, Japan's economy grew 3.7 per cent from the first quarter, the fastest since January-March 2008.
Inventories cut 0.5 percentage point from Japan's GDP in April-June, more than double a 0.2 percentage-point deficit the previous quarter. This suggests inventories will contribute to growth in the July-September quarter as companies stockpile goods to meet a pick-up in demand at home and abroad, economists say.
But the rise in output isn't likely to translate into higher corporate spending as manufacturers are still operating at around 70 per cent of capacity, economists say.
Capital expenditure in April-June marked five consecutive quarters of contraction, the longest such streak since 1976.
The April-June data also showed that the domestic demand deflator, an indicator of price trends, fell 1.7 per cent from the same period a year earlier, faster than a 1 per cent annual decline in the previous quarter as deflationary pressures mount.
External demand, the balance of exports and imports, added 1.6 percentage points to April-June GDP due in part to China's $585 billion stimulus package and other such spending rolled out by governments around the world to combat the global recession.
Tokyo's stimulus steps helped private consumption, which accounts for about 60 per cent of the economy, to rise 0.8 per cent and public investment to increase 8.1 per cent.
Capital spending fell 4.3 per cent, smaller than a 5.9 per cent drop expected by economists but marking the fifth straight quarter of slump as companies remain cautious about the outlook for global final demand.
Japan's economy shrank more than most other major economies until January-March as its exports had plunged due largely to its specialisation in machinery and high-end consumer products such as cars and flat-screen televisions.
Meanwhile, the Nikkei average fell 3.1 per cent today in its biggest one-day fall in nearly five months, on profit-taking sparked by worries the surge in stocks had run ahead of economic recovery.
An unexpectedly weak reading on U.S. consumer confidence and falls in U.S. share prices late last week, as well as declines in oil prices and Chinese equities, raised worries that risky assets were due for a pull-back.
Resource-linked shares such as Inpex Corp retreated due to the slide in oil prices, while exporters such as Kyocera Corp fell as the dollar dipped against the yen and pulled away from an eight-week high hit earlier this month.
The Nikkei slid 328.72 points to 10,268.61, its lowest closing level in about two weeks, and down from a 10-month closing high of 10,597.33 on Friday. The Nikkei's 3.1 per cent slide was its biggest one-day percentage fall since late March.
The broader Topix index fell 2.5 percent to 949.59.
The fall in Tokyo shares occurred in relatively thin volume, with 1.97 billion shares changing hands on the Tokyo exchange's first section, just slightly above last week's daily average of 1.94 billion, which was the lowest daily average since 1.78 billion shares in the week of February 16th to 19th.
Bucking the overall trend were flu-related shares. Shares of drugmakers and companies that produce medical masks and the fabrics used to make them jumped after news of Japan's first death from the H1N1 flu.
Daiichi Sankyo climbed 2.9 percent to 1,998 yen. It and Australian biotech firm Biota said last week a new flu drug, which was billed as possibly effective against both H1N1 swine flu and H5N1 bird flu, has succeeded in late-stage trials in Asia.
Declining stocks outnumbered advancing ones by nearly 6 to 1.
Investors and analysts said the Nikkei was unlikely to fall too sharply in the near term, as economic fundamentals were likely to remain solid at least until the July-September quarter.
Bearish technical signals could add to the selling momentum, judging from a form of technical analysis known as Moving Average Convergence/Divergence (MACD). The MACD line is now nearly overlapping with the signal line on daily charts and close to breaking below it, in what would be a bearish signal.
The market is vulnerable to quick shifts in sentiment, with trade led by short-term players, said Ichiyoshi's Akino.
"Right now there are only short-term players, because it is hard to tell how corporate earnings and economic sentiment in the second half of the fiscal year and beyond will turn out," Akino said, referring to the period from October and beyond.
Reuters