Aug. 18 (Bloomberg) -- Kazuhiko Nakano, who heads corporate planning at NOK Corp., chuckled when asked whether Japan can sustain a recovery from its third recession in a decade. ``What economic slump?'' he said. NOK, which makes flexible circuit boards for cell phones, plans to spend $57 million building a factory near Tokyo to meet demand from the likes of Sony Ericsson Mobile Communications AB. The company expects profit to jump 90 percent in the six months through Sept. 30, Nakano said. Spending by NOK, Sharp Corp., Canon Inc. and other Japanese exporters helped the world's No. 2 economy grow at an annual pace of 2.3 percent in second quarter in real terms, almost matching the 2.4 percent rate in the U.S. To last, the recovery must ignite consumer spending and end five years of deflation, which has left Japan's $4.2 trillion economy $100 billion smaller than it was in 1996, before adjusting for falling prices, investors said.
``We are clearly seeing that Japan's economy is on a recovery track,'' said Ku Shin, who manages about $2 billion in global assets at Banc One Investment Advisors Corp. in Columbus, Ohio. ``But it's still questionable if we are going to see sustainable growth.'' Exporters such as Sharp, Japan's largest maker of liquid- crystal displays, have stoked a 30 percent gain in the Nikkei 225 Stock Average since it fell to a two-decade low on April 28. The index is still 74 percent below its peak of 38,915.87 on Dec. 29, 1989, before Japan's asset-price bubble burst, sparking a spiral of falling prices, wages and land values.
U.S. Tax Cuts
Japanese stocks gained today after a U.S. Federal Reserve report Friday showed factory production rose 0.5 percent in July, the biggest gain in six months. The Nikkei rose 1 percent to 9960.94 at 11 a.m. in Tokyo. Shares of companies that depend on consumer spending, which accounts for more than half of the economy, have lagged the Nikkei index. Seven-Eleven Japan Co., the nation's largest convenience store chain, has gained 9.8 percent since April 28. Kao Corp., Japan's largest household products maker, has gained 2 percent. Exports, already rising because of the end of war in Iraq, may get a further lift from President George W. Bush's $330 billion of tax cuts, which are fueling U.S. consumer spending. The world's largest economy buys more than a quarter of Japan's exports. ``The tax cuts in the U.S. should be a plus for Japanese exports starting in July, and will continue to be positive in the second half,'' said Shoichi Yamasaki, an economist at Sumitomo Life Research Institute Ltd.
Rising Yields
There are some other hopeful signs. U.S. retail sales rose 1.4 percent last month from June, the biggest gain in four months, as shoppers bought more cars and electronics. Planned tax cuts in Germany may lift the world's third-largest economy out of recession. Benchmark 10-year Japanese government bond prices have fallen in anticipation of an economic recovery, more than doubling yields since they fell to a record 0.43 percent on June 11. The yield on the 1 percent bond maturing in 2013 rose 9 basis points to 1.185 percent at 12:30 p.m. A basis point is 0.01 percentage point. ``Quite a lot of people are revising their estimates for growth, and that will put a floor on declines in yields,'' said Patrice Conxicoeur, who oversees the equivalent of $758 million in investments as chief executive officer at Sinopia T&D Asset Management Co. in Tokyo.
Gearing Up
Economists Paul Sheard and Matthew Poggi at Lehman Brothers Japan Inc. last week raised their forecast for growth this year to 2.2 percent from 1.4 percent. UBS Securities Japan Ltd. economists Hiromichi Shirakawa and Ayako Mitsui raised their forecast to 1.1 percent from 0.7 percent. Exporters are gearing up for higher overseas sales. Manufacturers employing more than 1,000 people plan to increase capital spending by 11.5 percent this fiscal year to March 31, the Bank of Japan's widely watched Tankan business confidence index showed last month. Large manufacturers were the least pessimistic in two years, the survey showed. Advantest Corp., the world's biggest maker of memory-chip testing equipment, returned to profit in the three months to June 30 after seven quarters of losses, as sales almost doubled. One of its customers, Toshiba Corp., the world's second-largest chipmaker, is spending 350 billion yen ($2.94 billion) in the next four years to increase production. Another reason for optimism: The jobless rate fell for the first time in four months in June, dropping to 5.3 percent from 5.4 percent as companies such as Canon, the world's third-largest maker of digital cameras, and Yahoo Japan Inc. added half a million new jobs. Wages rose in May and June after a two-year decline, suggesting that consumer spending may take off.
Bad Loans
``The job market has clearly improved,'' said Kenji Ozaki, a spokesman at Pasona Inc., Japan's biggest job-placement agency. ``We're seeing an increase in demand not just for temporary workers, but for full-time staff as well.'' Declining unemployment is boosting the re-election prospects of Prime Minister Junichiro Koizumi, who has vowed to clean up 44.5 trillion yen of bad loans at Japanese banks and curb the developed world's largest national debt. Koizumi faces re-election Sept. 20 as head of the Liberal Democratic Party, a post he must keep to remain prime minister. At the same time, any decline in exports might put an end to Japan's rebound. Japan's previous economic expansion, which lasted 20 months, ended in October 2000 as the U.S. headed toward recession. ``There's not much reason for us to think that the domestic economy is improving,'' said Hiroshi Tanaka, executive officer of accounting at Yamaha Motor Co., the world's second-largest motorbike manufacturer. ``The domestic motorbike market is about the same as last year, but people are buying smaller 50cc bikes, not the more profitable big ones.''//www.bloomberg.com