Consumer spending is pulling Japan out of recession.
This release helped spark a huge rise in the Yen. Is Japan entering a virtuous cycle?
Tokyo, Sept. 9 (Bloomberg) -- Japan's economy expanded for
the second straight quarter in April-June, as resurgent consumer
spending helped snap the country's longest ever recession.
Gross domestic product expanded 0.2 percent in the three
months ended June 30, following 2 percent growth in the first
quarter. The yen soared and stocks rose on the news of the first
back-to-back economic expansions in more than two years. Analysts
had expected a 0.3 percent contraction for the period.
``The results show a clearer picture of an economy that is
picking up,' said Yuzo Seto, chairman of Asahi Breweries Ltd.,
Japan's second-largest brewer. The maker of Asahi Dry, Japan's
most popular beer, is set to open a new brewery in 2002 that can
produce 40 percent more beer than its Tokyo plant, which will be
closed.
The return to growth will cheer overseas investors, who have
staked $50 billion buying Japanese stocks this year on the
premise that the world's second-biggest economy is recovering.
For the government, it means the next round of economic pump-
priming measures may not be as costly as expected.
The benchmark Nikkei 225 stock index rose 36.18 points, or
0.2 percent, to 17.783.62, led by retailers and chemicals
companies. Bonds were little changed on signs growth is not
fanning inflation. The yen jumped as high as 108.85 to the
dollar, and recently traded at 109.13, up from 111.79 yen, as
investors bought yen-denominated assets.
U.S. Reaction
``The rise in GDP came largely from the private sector which
is a good sign,' said Marshall Gittler, currency strategist at
Bank of America Corp. in Hong Kong. The report is ``definitely
yen positive,' he said.
U.S. Treasury Secretary Lawrence H. Summers, while refusing
to comment on the specifics of the report, told reporters,
``Certainly there are now a number of indicators suggesting that
there has been improvement in the Japanese economic and financial
situation.'
``But there are always fluctuations in economies and what's
going to be crucial is whether economic growth is domestic-demand
led and becomes self sustaining,' he said. He didn't talk about
the value of the dollar or the yen.
Consumer Spending
Japanese shoppers helped lead the economy into its second
quarter of growth. Consumer spending, which accounts for three-
fifths of GDP, rose 0.8 percent in the quarter, the second
straight increase after a year of decline. Spending on housing
soared a record 16.1 percent, helped by the low mortgage rates
offered by the Housing Loan Corp.
Home buyers flocked to the government lender to get cheap
loans after it cut its benchmark home loan rate to 2 percent in
October. The rate has now risen to 2.6 percent. The corporation
also provided tax breaks to borrowers and eased qualification
standards.
IBM, the world's biggest computer maker, is benefiting from
rising consumer spending. PC shipments will rise 26 percent this
year from last, according to research company IDC Japan Ltd. PC
sales at large electronics stores in Japan rose 62.5 percent in
the week ended Aug. 22 from the same period a year earlier.
Spending had been anemic since the government raised the
consumption tax to 5 percent from 3 percent in April 1997.
Workers have also been concerned they could lose their jobs as
companies pare staff to cut costs. The jobless rate held at a
record 4.9 percent in July.
The government has pledged to spend 540 billion yen in an
effort to stem rising unemployment. The plan is intended to
create 720,000 jobs.
``Given that I still see unemployment and wages continuing
to head downward, I'm not yet convinced consumption can sustain
its recovery,' said Ron Bevacqua, senior economist at Commerz
Securities (Japan) Co. ``I'm not yet convinced that this is the
beginning of a sustained domestic-demand driven recovery.'
Government Spending
The government will now decided how much more to spend to
meet its target of 0.5 percent growth in the fiscal year to March
2000. The target can be achieved even if the economy shrinks 0.5
percent each of the next three quarters.
EPA head Taichi Sakaiya, who offered to resign if the target
wasn't met, looks to have kept his job. The government is sure to
hit the target and may even raise it now, he said.
The next supplementary budget, which Finance Minister Kiichi
Miyazawa wants ready by the end of November, should contain about
4 trillion to 5 trillion yen of real-water spending, Sakaiya told
reporters after the GDP report was released.
Government spending, which powered the economy in the first
quarter, ran out of steam in April-June. Spending, including on
public works, fell 4 percent in the quarter, after rising 10.3
percent in January-March. ``A seamless continuation of government
spending is indispensable' to keep the economy growing, Sakaiya
said.
Rates Unchanged
Both Sakaiya and Miyazawa said recovery is no sure thing.
Government officials have been reticent to trumpet a full-blown
recovery, lest they fuel further rises in the yen. The Bank of
Japan bought some $30 billion of dollars in June and July in a
failed bid to stem the yen's rise.
The bank's policy-setting board, which met today, voted to
keep interest rates, which are hovering near zero, unchanged.
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