Fears that Japan's recovery is heading for further slowdown deepened on Wednesday as data showed the country's trade with the world rose only slightly and corporate spending fell in October, 2010. The health of the trade-reliant economy continues to create concern as exports -- its main engine for growth -- slow down because of a strong yen and waning overseas demand while domestic demand remains soft.
Japan's Economic Fiscal Policy Minister Banri Kaieda told reporters on Wednesday that he expected growth to be "substantially lower" in the fourth quarter of the current year. The current account surplus -- the broadest measure of trade with the rest of the world -- widened by 2.9% in October vis-a-vis the previous year to settle at 1.44 trillion yen (17.20 billion dollars). This is a direct contrast to the expectations of a 7% rise.
Other data from the finance ministry showed core private sector machinery orders, a leading indicator of corporate capital spending, fell 1.4% in October from the previous month, the second consecutive decline after a 10.3% fall in September, this year. The data also missed expectations of a 0.1% decline. Wednesday's data illustrated that the double punch of the expiration of government subsides for automobiles and other goods combined with slowing US, European and Chinese demand continued to threaten Japan's economy.
"The next couple of quarters are likely to be tough for Japan, as expiring incentives for purchases of consumer durables hurt demand," noted Richard Jerram of Macquarie Bank. "Stalling exports and a soft industrial cycle will erode corporate profitability and damage the manufacturing investment cycle." However, Jerram also pointed out that robust Japanese machinery export orders indicated an acceleration of economic activity in the region and may help soften the blow for Japan. "If exports can show some modest growth then Japan should be able to avoid recession", he said.
Recent data showed October exports grew at the slowest pace compared to the rest year subsequent to the yen trading at 15-year highs against the dollar, hammering the competitiveness of a crucial sector. "The yen's strength has also weighed on corporate sentiment," Norio Miyagawa, an economist at Mizuho Securities Research & Consulting, told Dow Jones Newswires. "Which in turn has played a role in keeping the capital expenditure improvement still rather mild." A strong yen not only makes Japan's growth-driving exports more expensive but erodes companies' overseas profits when repatriated, with many firms considering sending more production overseas as a result.
It also makes imports cheaper, contributing to a damaging cycle of deflation in which falling prices prompt consumers to hold off on purchases in anticipation of further falls, clouding future corporate investment. Japan has reduced its official interest rate to almost zero and recently passed an extra budget worth 58 billion dollars to cover a new stimulus package aimed at averting the threat of a "double-dip" recession.
Prime Minister Naoto Kan's second stimulus package, since he came to power, is designed to ease concerns over deflation and a strong yen. It includes job programmes, welfare spending and assistance for small businesses, as well. Kan took office in June, 2010 promising to slash spending and work towards cutting its massive public debt, accounting for nearly 200% of gross domestic product, by avoiding issuing new bonds to pay for stimulus measures. But the state of Japan's economy has complicated his ambitions.