Bloomberg News

Japan’s Exit From Slump May Be Short-Lived on European Woes

November 13, 2011

(Updates with Azumi comment in the eighth paragraph.)

Nov. 11 (Bloomberg) --?Japan’s economy probably expanded at the fastest pace in more than a year last quarter, a rebound that may not be sustained as Europe’s debt crisis sends stocks plunging and boosts the yen.

Gross domestic product grew at an annual 5.9 percent in the three months ended Sept. 30, reversing three consecutive quarters of contraction, according to the median forecast of 24 analysts surveyed by Bloomberg News. The Cabinet Office will release the report at 8:50 a.m. in Tokyo on Nov. 14.

A resurgence in production and exports by companies including Toyota Motor Corp. is showing signs of waning as a yen trading near postwar highs against the dollar forces companies to cut their profit forecasts. A report on machinery orders yesterday indicated companies may pare spending into next year as they brace for a slowdown in global demand.

“This is good news, but it doesn’t eradicate the uncertainties that lie ahead,” said Junko Nishioka, chief economist at RBS Securities in Tokyo and a former Bank of Japan official. “The rebound is going to lose momentum as sluggish overseas demand outweighs reconstruction -- we’re a long way from seeing a sustained recovery.”

The Nikkei 225 Stock Average was fluctuating between gains and losses as of 11:03 a.m. in Tokyo today. It fell the most since Aug. 5 yesterday, after a surge in Italy’s bond yields stoked concern that Europe’s debt crisis is spreading. The yen traded at 77.61 per dollar.

Growth Peaked

Recent reports suggest growth has already peaked. The government said yesterday companies plan to cut machinery orders this quarter for the first time this year, an indication they will trim capital spending. Industrial production fell 4 percent in September, the first drop since the March earthquake.

Japan intervened in the currency market for the third time this year on Oct. 31 after the yen rose to a postwar record of 75.35 yen against the dollar. Former Finance Ministry official Eisuke Sakakibara, who was known as “Mr. Yen” during his spell at the ministry from 1997-1999, said last month at a Bloomberg conference in Tokyo that the Japanese currency may strengthen to the low 70s against the greenback.

“I’m watching markets with great interest for speculative trading and excessive movements,” Finance Minister Jun Azumi told reporters in Tokyo today. He declined to comment on whether the nation has been selling the currency this month.

Asset Purchases

The central bank, which will hold a two-day policy meeting after the GDP data is released, expanded its asset-purchase program last month in a bid to shelter the economy from the damage of the strong yen.

Japan’s publicly traded companies lost a total of 301 billion yen ($3.9 billion) because of the currency’s advance to a record high, a report by Tokyo Shoko Research Ltd., a credit research company, showed this week. Nintendo Co., the world’s largest maker of video-game machines, forecast its first annual loss in at least 30 years after the yen reached its highest since World War II and sales its new 3DS console were weaker than expected.

“We’d like the government to do more,” Yuji Isoda, manager of investor relations at shipping line Nippon Yusen K.K., told reporters in Tokyo after Japan intervened last month. “Ideally we’d like the yen to weaken to around 85 yen to 90 yen against the dollar.”

Economists’ forecasts for Japan’s GDP suggest expansion in the world’s third-largest economy exceeded that of the U.S. in the third quarter. The rebound will probably cool to 2.3 percent this quarter, according to the average estimate of 42 analysts surveyed by the government-affiliated Economic Planning Association.

Export Rebound

Exports probably climbed 6.7 percent in the third quarter, rebounding from a slump in the previous period, according to the median estimate of 24 economists surveyed by Bloomberg News. Capital investment rose 1 percent, compared with a 0.9 percent drop in the second quarter, analysts said.

The lower house of parliament yesterday approved a 12.1 trillion yen reconstruction package to rebuild from the March disaster, on top of two packages worth a total of 6 trillion yen already pledged. GDP data suggests rebuilding demand hasn’t kicked in yet, with government spending down 0.9 percent last quarter.

Next year “will be a tug-of-war between the negative external environment that will rein in the growth of exports and an increase in domestic demand brought about by government spending,” said Masayuki Kichikawa, chief Japan Bank of America Merrill Lynch in Tokyo.

Thailand Flooding

Exporters hit by the strength of the yen have also been battered by parts shortages stemming from flooding in Thailand. Toyota, Asia’s largest automaker, followed Honda Motor Co. by saying in statement Nov. 8 the record floods had forced it to scrap its annual profit forecast. The Toyota city, Japan-based company’s profit fell a more-than-expected 19 percent to 80.4 billion yen in the quarter ended Sept. 30.

“The Thai flooding has been very frustrating for major Japanese companies,” said Martin Schulz, a senior research fellow at Fujitsu Research Institute in Tokyo. “The floods are a reason why the pressure is so high on the government for intervention” in the currency markets, he said.

--With assistance from Toru Fujioka in Tokyo. Editors: Lily Nonomiya, Ken McCallum

To contact the reporters on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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