Japan's GDP Growth Slows in Q2


Japan's economic growth slowed more than economists forecast in the second quarter, making it less likely the central bank will raise interest rates next week after a global credit crunch.

The world's second-largest economy expanded at a 0.5 percent annualized rate in the three months ended June 30 from a revised 3.2 percent in the first quarter, the Cabinet Office said in Tokyo today. The median estimate of 27 economists surveyed by Bloomberg News was for 0.9 percent growth.

The report is the last main economic indicator before the Bank of Japan's Aug. 22-23 meeting to decide whether to raise the key overnight lending rate from 0.5 percent, the lowest of major economies. Investors already pared bets of a rate increase last week after global overnight interest rates surged because of rising losses linked to U.S. subprime mortgages, prompting central banks to inject cash into their financial systems.

``This won't encourage the Bank of Japan to go ahead with a rate hike in August, especially with the turmoil in the markets,'' said Takashi Omori, chief economist at UBS Securities Japan Ltd. in Tokyo. ``September is very likely, unless there is further turmoil.''

The yen traded at 118.33 per dollar at 4 p.m. in Tokyo, from 118.27 before the report. The yield on Japan's benchmark 10-year bond was unchanged at 1.715 percent. The Nikkei 225 Stock Average rose 0.2 percent to 16,800.05.

GDP Deflator

The GDP deflator, a broad measure of price changes, fell 0.3 percent from the same period a year earlier, less than analysts' predictions of a 0.4 percent drop. The domestic demand deflator, regarded by economists as key measure of price trends, rose 0.2 percent, the third increase in the past nine years.

``The fact that the domestic demand deflator is positive is reassuring as it shows the economy is making progress toward emerging from deflation,'' said Junko Nishioka, an economist at ABN Amro Securities in Tokyo.

Consumer spending rose 0.4 percent from the previous three months, half the pace of the first quarter.

Japan's consumers are losing the incentive to spend because of falling wages and higher taxes. Household sentiment fell to a two-year low in July and wages slumped for a seventh month, even as the jobless rate fell to a nine-year low of 3.7 percent.

``Tax-burden increases are weighing on sentiment, so any rebound in spending is going to be limited,'' said Junichi Makino, a senior economist at Daiwa Research Institute in Tokyo.


Bloomberg
8/13/2007 12:26:44 PM