Japan Slows Less Than Estimated, Deflation Persists

Sept. 10 (Bloomberg) -- Japan’s economy slowed less than initially estimated in the second quarter as companies boosted capital spending, indicating the nation’s recovery was intact before a surge in the yen threatened to stunt export gains.

Gross domestic product grew an annualized 1.5 percent, faster than the 0.4 percent reported last month, after the first quarter’s 5 percent, the Cabinet Office said today in Tokyo. Unadjusted for changes in prices GDP shrank 0.6 percent compared with January to March.

“The upward revision could get rid of concern over a double-dip recession for now,” Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, said before the report. “Still, Japan’s economy may face a moment of truth in the fourth quarter to the first quarter of next year.”

Prime Minister Naoto Kan today unveiled details of a 920 billion yen ($11 billion) stimulus package today, his first since taking office in June, to shelter the economy from slower global growth and the yen’s climb to a 15-year high against the dollar. Japan’s central bank has also pledged to take additional measures as needed to sustain the recovery.

The revised real growth figure puts Japan’s expansion in line with the U.S., though nominal American GDP is rising because the country isn’t yet affected by deflation. The new figure matched the median of 21 estimates in a Bloomberg survey of economists.

Yen’s Gain

The yen traded at 84.21 per dollar at 10:35 a.m. in Tokyo from 83.99 before the report was published. It has risen more than 10 percent against the U.S. currency this year.

Japan’s economic output totaled $1.295 trillion in the second quarter, less than China’s $1.337 trillion, according to the Cabinet Office’s calculation. Japan remained bigger in the first half of 2010, the government agency said.

Capital investment advanced 1.5 percent from the previous quarter, faster than the 0.5 percent initially reported, today’s data showed. Net exports, or shipments minus imports, added 0.3 percentage point to growth, unchanged from the initial estimate.

Consumer spending, which accounts for about 60 percent of the economy, was unchanged from the previous quarter, the same reading as last month. Spending has been cooling as government stimulus measures aimed at encouraging consumers to buy electronics and cars fade.

Eye on Currency

“The report confirmed the economic recovery was sustained in the second quarter,” Keisuke Tsumura, a parliamentary secretary at the Cabinet Office, told reporters in Tokyo. “We need to monitor the strong yen and a slowdown in the global economy as possible downside risks.”

The Bank of Japan bolstered a credit program and Prime Minister Naoto Kan pledged fresh stimulus to help avoid the nation’s recovery from faltering on Aug. 30, two weeks after the preliminary GDP data showed growth was less than a fifth of the pace economists estimated.

The central bank kept liquidity injections unchanged on Sept. 7 after expanding a bank-loan program by 10 trillion yen ($119 billion) at an emergency meeting last week. BOJ Governor Masaaki Shirakawa said this week that the bank is ready to take more action if needed and he is “well aware” the yen may hurt business sentiment. Prime Minister Kan pledged to channel 920 billion yen to buttress domestic demand last week.

BOJ Outlook

“Chances for further easing will likely increase toward the year-end when the government may intensify its debate over whether to compile another stimulus and extra budget,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “The biggest trigger for the BOJ may be a combination of stronger yen and weaker stocks.”

The stronger currency is driving investment abroad as exporters protect profits. Nissan Motor Co., Japan’s third- largest automaker, is bolstering overseas investment in countries including Indonesia as it moves production out of Japan. It has said it is investing more than $20 million at a plant in　Indonesia to double capacity in the country to 100,000 vehicles　a year by 2013.

The GDP deflator, a gauge of price trends, fell 1.7 percent from a year earlier, narrowing from 1.8 percent first reported. Private inventory subtracted 0.1 percentage point from growth, less than the 0.2 point cut initially estimated.

While a slowdown is expected “the question is how deep and how long deceleration will be,” said Naomi Hasegawa, a senior debt strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “There are few reasons for us to be optimistic about the outlook.”