Japan’s GDP drops an annualized 2.4% in the second quarter

August 14, 2008
By Ken Worsley

Just three months ago, the Cabinet Office announced that Japan’s first quarter GDP has jumped a surprising 3.3% in annualized terms. No one expected a repeat of such rosy figures in the second quarter, and the 2.4% annualized contraction reported yesterday by the Cabinet Office was about what most observers had expected.

The bad news resounds: Exports fell by 2.3% in the second quarter, declining for the first time in three years. Imports fell 2.8 percent. Consumer spending was down 0.5%, while capital spending slipped 0.2 percent.

Looking through today’s headlines, it’s difficult to find good news: Cell phone sales have dropped through the floor - though this is a cause of an ill-explained change in the way mobile phones are sold in Japan, and should lead to sales increases next year. In the second quarter, sales at DoCoMo fell 21%, AU saw a 19% fall and Softbank’s sales slid 23%. As the Nikkei puts it:

The change came in response to a report on the handset sales system issued last summer by a panel of the Ministry of International Affairs and Communications.

Oh, it’s so easy to blame the bureaucrats (No, really - it is. No sarcasm intended there).

Bad loan writedown costs at Japan’s banks increased by 70% in the April-June quarter. Bear in mind, the government is pushing for further funds to be lent to small and medium sized enterprises who are struggling during these times.

Japan’s gross domestic income fell 1.0% in the second quarter while real gross national income slid 1.3% - those figures are not annualized and represent a stronger fall than GDP itself. Japan’s trading losses stood at a whopping 28 trillion yen in the second quarter.

Tokyo Kantei has reported that land prices nearby 55% of major train stations in Tokyo fell from their 2007 levels in the first half of 2008.

Resorttrust, a firm that operates resorts and makes much of its income from expensive (overpriced) membership sales, has announced that it may fall into the red over the coming months. Hotel memberships comprise 80% of the firm’s operating profit. If you happen to have ideas for diversification and reasonable consulting fees, feel free to contact them.

With about 55% of Japan’s GDP being derived from consumer spending and real wages having fallen against the previous quarter for the first time since, well…the third quarter of 2007, what sector might emerge as a growth engine? Certainly, the import costs of raw materials might abate in the third quarter, but will overseas shipments be able to cover the gap?

Now that the press is actually reporting that speculation by sovereign wealth funds is was driving up the prices of oil and other commodities (duh), price declines are being expected from some quarters. Benchmark crude oil prices on NYMEX have fallen about 18% since June 30, making some contrarians happy.

Still, oil prices are above their inflation adjusted peak of about $106 from the spring of 1980. Consumption in China and India isn’t exactly going away.

Back to Japan. The big question was posed above: What sector is going to emerge to take the lead and restore Japan on a path to economic growth? As Japanese firms apparently seek to recover their “emotional capital,” or level of employee loyalty sapped by years of shifting employees to part-time and contract worker status (which they euphemistically call performance-based wage systems), Prime Minister Yasuo Fukuda is looking at the possibility of reducing the burden of taxation on income derived from dividend payments. Whether or not the average individual investor would benefit from this scheme remains to be seen.

Will any of these measures help? Downturns are natural in any economy, or in any natural system, and this one comes as no surprise. There will be a recovery - it’s not just a matter of when, but when the proper steps towards one will actually be taken. Will we see a second consecutive quarter of GDP decline? Will anyone in the government take heed to the reasonable, balanced advice given this week by Bloomberg columnist William Pesek? As he puts it:

For a Group of Seven economy, Japan is still too much of a nanny state that believes public officials are better suited to make financial decisions than private managers.

Is it too late? Let’s see when these figures are revised downward, since the consumer spending (down only 0.5%) and capital investment (down only 0.2%) figures seem to make little sense.

Filed Under Business, Cabinet Office, Economic Reports, Economics, GDP

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