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Japanese GDP dip not seen signalling real recession

TOKYO: Japan is set to slip back into recession, technically at least, but analysts and the government agree that two quarters of decline will not signal that the fitful recovery has derailed.

Economic Planning Minister Taichi Sakaiya on Sunday lined up with most private-sector economists in forecasting gross domestic product for October-December last year would show a second quarter of decline after unexpectedly strong growth in the first half of 1999. The data is due out in early to mid-March.

Such a temporary setback may dampen overseas investors' euphoria over Japan's economic recovery, coupled with backtracking in recent reform efforts, analysts said.

But they largely agreed with Sakaiya that despite the expected stumble, the economy would pick up again as fresh government spending pours in and Y2K fears disappear.

Economists said the expected GDP decline could cloud the "buy Japan" mentality that swept through markets last year but that the economy could rebound as last November's 6.8 trillion yen ($63.23 billion) supplementary budget and an aggressive 85 trillion yen budget for the year starting on April 1 filter through to the economy.

BAD GDP DATA MAY CORRECT EXCESSIVE OPTIMISM

"The second consecutive quarter of decline may dampen bullish views on the economy among overseas investors, who are becoming increasingly sceptical of Japan's structural reform efforts," said Yunosuke Ikeda, an economist at Nomura Research Institute.

Foreign investors bought a net over nine trillion yen worth of Japanese stocks in 1999 but have not been piling up these assets aggressively since the start of this year as domestic demand-led recovery is not firmly established, analysts said.

Economists in a mid-January Reuters survey forecast on average that October-December GDP would dip 0.3 percent from the previous quarter, but views appear to have become a tad more bearish since then.

"The October-December growth would have been minus due to sluggish consumer spending, affected by a fall in winter bonus payments," Sakaiya said on Sunday on a television programme.

Concerns about the Y2K computer problems also restricted spending on expensive items and services, he said.

Nomura Research forecasts a 1.4 percent drop, on the back of the 1.0 percent decline in the July-September quarter. But Ikeda said Nomura Research expects the economy to recover this year.

RECOVERY SCENARIO REMAIN INTACT

Sakaiya, too, expressed confidence that the government, which is counting on a healthy economy in the run-up to elections that must be held by October, would meet its growth forecast of 0.6 percent for the full fiscal year ending on March 31.

Sakaiya also said the Japanese economy is likely to do better in the current January-March quarter due to brisk car sales and prospects that corporate capital spending, a key engine for economic growth which accounts for about 15 percent of the economy, will recover later this year.

Richard Jerram, an economist with ING Barings in Tokyo, said the GDP data itself was of poor quality and must be treated with caution. "The idea that the Japanese economy fell back into recession in the second half of calendar year 1999 is about as absurd as the claim, from published GDP data, that it boomed in the first half of the year," Jerram wrote in a weekly report.

Sadaaki Tsunakawa, a foreign exchange manager at Citibank NA, said he doubted if the GDP data could provide an accurate picture of the real economy, particularly regarding the future course of the economy.

"In the past, good GDP data affected the stock market and might have set direction for the economy, but things are becoming upside down," he said.

Movements of the stock market, particularly blue-chip stocks related to information technology, are becoming important to the economy and overseas investors are closely watching if an information technology revolution will take place as has occured in the U.S. economy.-Reuters