Japan Economy Grew 0.4% in Second Quarter, Less Than Economists Estimated

Japan’s economy expanded at the slowest pace in three quarters, missing the estimates of all economists surveyed as global demand cooled and stimulus effects wore off.

Gross domestic product rose an annualized 0.4 percent in the three months ended June 30 from a revised 4.4 percent expansion in the first quarter, the Cabinet Office said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for annual growth of 2.3 percent.

Profits of exporters from Toyota Motor Corp. to Honda Motor Co. are under threat from the yen’s advance to a 15-year high against the dollar. Moderating growth may pressure the Bank of Japan to ease monetary policy to spur the expansion and stamp out deflation as the nation’s public debt, the world’s largest, constrains the government’s ability to do so.

“The scenario for a moderate recovery is becoming unrealistic,” Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo, said before the report. A slowdown in emerging Asia and a further advance in the yen “may force the central bank to do something to help the economy,” he said.

The Nikkei 225 Stock Average fell 1.2 percent at 9:04 a.m. in Tokyo. The yen traded at 85.90 per dollar at from 85.95 before the report. Economists’ growth estimates ranged from 0.6 percent to 3.4 percent.

Prime Minister Naoto Kan said he is concerned about the rising yen, Kyodo News reported on Aug. 14. Japan’s currency may climb to a record, Eisuke Sakakibara, formerly Japan’s top currency official, said yesterday on the Fuji television network.

‘Excessive’ Yen Moves

The strengthening currency prompted Finance Minister Yoshihiko Noda to say last week “excessive” moves can hurt the economy, remarks that helped the currency pare its gains. He pledged to work with Bank of Japan Governor Masaaki Shirakawa, who said in a statement the bank is closely watching “substantial” movements in foreign-exchange and stock markets.

“If the Japanese economy is forced to create a production structure based on 85 yen to the dollar, that would be disastrous,” as the nation wouldn’t earn enough from exports to pay for commodities from overseas, Honda Motor Co. Chief Financial Officer Yoichi Hojo said on Aug. 5.

The BOJ introduced a fixed-rate lending facility last December after the yen surged and stocks plunged. The program was doubled to 20 trillion yen in March. The central bank has kept the benchmark interest rate at 0.1 percent since lowering it in December 2008.

Government Incentives

The government has been offering shoppers incentives to buy energy-efficient cars and electronics to support the economy. The measures have helped spur consumer spending, which accounts for more than half of the economy and some are scheduled to expire this year.

“While the government’s stimulus effects are running out of gas, a delayed recovery in employment and income conditions is confining consumers with shackles,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo.

The slowdown in the second quarter contrasts with reports from Japan’s biggest companies that signaled a better earnings outlook, even as the yen surges. Toyota, Honda, Sony Corp. and Panasonic Corp. were among firms that raised profit forecasts over the past month.

Slower growth may undermine Kan’s efforts to reduce the world’s largest public debt. Kan’s focus on fiscal discipline has irked members of his ruling Democratic Party of Japan, which lost an upper-house election in July after he said he will consider doubling the country’s sales tax to 10 percent. He faces a party leadership vote next month.

Budget Constraints

Kan has pledged to cap bond sales and spending for the next three years to prevent the country’s finances from collapsing.

Pressure to uphold fiscal discipline may waver after benchmark 10-year bond yields fell to a seven-year low last week, reducing the government’s borrowing costs at a time when public debt is approaching 200 percent of the economy.

“Fiscal consolidation is a long-term challenge that Japan has to tackle,” said Hiroshi Watanabe, a senior economist at the Daiwa Institute of Research in Tokyo. “But the government may tone down its commitment to improving financial health as plunging yields” reduce a sense of crisis, he said.