Recession may grip Japan, but China shops hard

Recent data from Japan and the euro zone have reflected a much larger negative impact than initially expected from the deteriorating US housing sector, credit crisis and surging oil prices

Japan’s economy shrank in the second quarter, as a slowdown in demand likely dragged the world’s second largest economy into a recession, but China’s record retail sales in July helped bolster the global outlook.

Japan’s economy contracted 0.6% on a quarterly basis, the fastest since 2001 when it was last in a recession, ending the longest period of uninterrupted growth in six decades and putting the global economy at risk of a prolonged slump.
Recent data from both Japan and the euro zone have reflected a much larger negative impact than initially expected from the deteriorating US housing sector, fallout from the credit crisis and surging oil prices.

As a result, forecasts for higher interest rates to fight price pressures have been pushed back.

Economists are expecting data due later to generally tell the same story of endemic weakness in developed markets. The legion of unemployed Britons claiming benefits in July is expected to spike by the most since 1992, while US retail sales are predicted to have slipped.

“The pullback in the Japanese economy was quite broad, perhaps more broad-based than expected, but the global component is with the trade figures since exports were down quite a bit,” said Jan Lambregts, head of Asia research with Rabobank Global Financial Markets in Hong Kong. “Japan compared with five years ago has a much more diversified set of export destinations, but if all of them are slowing down, there is no real shelter,” he said.

Tokyo’s Nikkei share average tumbled 2.1%, with shares of companies that derive their revenues from both abroad and at home hit hard on fears about much slower global growth. Outside of Japan, stocks in the Asia-Pacific region sank to a 17-month low, according to an MSCI index.

The annnualized contraction of 2.4% in Japan compared with 1.9% growth in the same quarter in the US, where government stimulus supported the economy.
Euro zone second quarter GDP figures are due on Thursday.

Many economists say the Japanese economy is in much better shape than when it went through slumps in 1998 or 2001, with companies having cleaned up their balance sheets after the collapse of an asset bubble in the 1990s.

Japan’s economics minister Kaoru Yosano said the economy was weakening, hurt mainly by external factors such as high oil prices, but added that it won’t keep falling. “Even though the economy contracted in April-June, it would be more accurate to think that it won’t last long,” Yosano said.

A somewhat bright spot in an otherwise blighted global economic scene was non-Japan Asia, where consumers looked forward to an easing in inflation, which has plagued the region’s markets, fomented riots and confounded policymakers.

Retail sales in China, the world’s fastest growing major economy, grew at a record annual rate of 23.3% in July on the back of rising incomes, sparking hopes that Beijing’s efforts to shift to more consumer-driven growth have found some success.
However, China’s flimsy social security system, high labour market turnover and expensive health care and education mean households still save about 30% of their incomes. “The potential for China’s domestic consumption is huge, but it will be a long-term process for China to wean its economy off exports and investment,” said Zhao Qingming, an economist at China Construction Bank in Beijing.

A 23% drop in oil prices since mid-July has also brightened the mood of Australia’s consumers.