TOKYO (AFX-ASIA) - Japan's second quarter to June GDP was roughly in line with expectations, with little impact from the data seen on the financial markets, analysts said.
However, many economists had been waiting for the release before adjusting down their annual growth forecasts, which they had set at more optimistic levels earlier in the year before the seriousness of the downturn became clear.
Second quarter to June GDP fell 0.8 pct from the March quarter, when the quarter-on-quarter rise was 0.1 pct, the Cabinet Office said. June quarter GDP fell an annualised 3.2 pct.
Private sector economists saw second quarter GDP coming in at a fall of 0.4-1.8 pct over the previous quarter, with a consensus for a decline of around 0.9 pct.
A government official reportedly told lawmakers earlier this week that the figure would come in at a negative 1.2 pct, although the Cabinet Office later said the official had been refering to market estimates.
The markets reacted little to the figures, with the dollar falling to around 120.72 yen immediately after the release but quickly recovering.
Shares were lower but mainly due to declines on Wall Street and concerns over the state of domestic banks.
Mizuho Securities chief market economist Yasunari Ueno said equities took the result calmly as the data does not affect near-term policy management.
"It seems that the situation where the government is trying to keep economic activity afloat while holding to the 30 trln yen JGB issuance cap is not likely to last much longer," he said.
The Cabinet Office said a negative contribution from domestic demand, together with a sustained fall in net exports pressured the second quarter GDP number.
In the second quarter, domestic demand accounted for 0.7 percentage points of negative growth, the largest negative contribution since the fourth quarter of 1999 when it ran at 1.5 percentage points. Net exports was down 0.1 percentage points, the fourth consecutive quarterly negative contribution.
Finance Minister Masajuro Shiokawa described the figures as "severe" and announced that Prime Minister Junichiro Koizumi had ordered him to begin compiling a supplementary budget to help boost the economy.
However, he added that new spending will not exceed the 30 trln yen bond issuance limit set by the premier or include public works projects, instead focusing on measures that contribute to promoting structural reforms.
Heizo Takenaka, State Sinister of Economic and Ficsal Policy, said the government may allow the economy to experience a GDP contraction, as long as it is "minor", given current fiscal constraints.
He said that while respecting the 30 trln yen cap as much as possible, the government may "ease (the limit) boldly and flexibly, should the risk that the Japanese economy fall into a deflation spiral emerge."
Takenaka added that his personal opinion is that growing deflation is a key challenge that needs to be addressed by the whole government, rather than just an issue to be handled by the Bank of Japan.
Societe Generale economist Shuji Shirota said further easing by the central bank is possible on Sept 19 given the weak GDP and stock prices ahead of the fiscal half year-end.
"We should be on the watch for further easing steps by the BoJ, which could come as soon as the Sept 18-19 monetary policy meeting," he said.
"Political (and) global pressure is also likely to mount ahead of the G7 meeting of finance ministers and central bank governors on Sept 22."
Shirota added that he will probably downgrade his 2001 growth forecasts to flat to minus 0.5 pct, from the previous 0.2 pct growth, after the second quarter GDP figures. "Any recovery in 2002 will most likely be L-shaped," he said. Private consumption showed unexpected resilience, with a 0.5 pct rise, but other areas were weak, he noted. "Housing investment continued to fall even more sharply, by 8.8 pct, while business capital expenditures contracted for the second consecutive period, by 2.8 pct. Private demand decreased for the first time in a year," he said. "In the public sector, government expenditures remained firm, supported by growing social security spending and consumption of fixed capital. "However, a decline in public works spending dragged down investment by 4.1 pct. Exports fell more sharply than imports, as the slowdown in overseas economies weighs on exports while a higher import penetration ratio supports the latter even given the domestic economic slump." BNP Paribas chief economist Ryutaro Kono said the GDP was in line but agreed that it will increase pressure on the Bank of Japan and the government to stimulate the economy. "The year's economic growth must be negative, so political pressure will build on the Bank of Japan and the government to form a stimulus package," he said, adding that he sees a 0.6 pct contraction for 2001. "We believe the economy will bottom out in the fourth quarter (to March 2002) but the government has decided to cut expenditure especially on public works ... so next year we will see minus growth," he said. Kono said the space for a sizable supplementary budget is "very very limited", adding: "I don't think they need a supplementary budget; it is very bad policy because public money always goes to inefficient spending." Aozora Bank senior economist Yasukazu Shimizu said he does not expect any large supplementary to push up overall growth. Shimizu said his brokerage will likely revise its GDP forecast for the year to March 2002 to a fall of 1.0-1.5 pct from the previous estimate of a 1.0 pct fall and cut its third quarter forecast to fall of around 1.0 pct. "We expect capital expenditure will continue to slow in the third quarter due to slowing exports given the global economic slowdown," he said. Shimizu said he does not expect the Bank of Japan to ease its quantitive monetary policy at the next board meeting this month as the GDP figures did not show unexpected negative growth.