Japan economy weaker than estimated in second quarter

Devastated Kesennuma city in Miyagi prefecture The earthquake and tsunami caused widespread damage to Japan's north-east coast

Japan's economy contracted more severely in the second quarter than was initially estimated, revised government data has shown.

The economy shrank at an annual rate of 2.1% during the period, compared with the 1.3% drop reported previously.

The decline came as companies cut back spending due to concerns about a slowing global economy and a rising yen.

The data raised fresh concerns about the health of Japan's economy.

"As capital spending is unlikely to grow as strongly as previously thought, a rebound in gross domestic product in July-September may be smaller than initially thought, although gradual recovery is still expected," said Yuichi Kodama of Meiji Yasuda Life Insurance in Tokyo.

Global concerns

Japan's economy is currently in recession and has contracted for three quarters.

Growth in the country was hit hard by the earthquake and tsunami early this year which caused widespread damage to infrastructure and the supply chain, resulting in many factories suspending or curbing production.

Start Quote

Very few companies are thinking about investing in Japan. They are focussing intensely on overseas expansion”

End Quote Martin Schulz Fujitsu Research Institute

To make matters worse, just as the economy was showing signs of recovery, fears of a slowdown in the global economy started to gather pace.

"The pace of Japan's economic recovery has apparently slowed since around August due to heightened uncertainty about the global economy," said Mr Kodama.

Analysts said that a slowdown in the global economy is likely to dent demand for Japan's exports and that has resulted in companies cutting back their spending.

Data out on Friday showed that overall investment by businesses fell by 0.9% in the three months to the end of June, compared with a 0.2% rise estimated earlier.

This follows data released by the Ministry of Finance last week, which showed that capital expenditure by companies, investment in plants and machinery, had dropped by 7.8% in the second quarter from a year earlier.

Yen factor

At the same time, Japanese firms have also been hit by a strengthening yen.

Mizuho International spokesman Seijiro Takeshita: "This is the aftermath of the Japanese earthquake earlier this year"

Uncertainty about global economic growth has seen investors turn to traditional havens such as the yen, sending the Japanese currency to record highs.

Analysts said this was making the recovery process even tougher for firms.

"This is what frustrates companies so much," Martin Schulz of Fujitsu Research Institute told the BBC.

"They have fixed the supply chains and production lines, but they are unable to sell their goods as a strong yen is making them more expensive," he added.

Analysts said that not only was the strong yen hurting exports, it was also deterring companies from expanding their businesses in Japan.

"Very few companies are thinking about investing in Japan. They are focusing intensely on overseas expansion" Mr Schulz said.

He explained that a due to the strong currency, Japanese firms were in a position to make overseas acquisitions for a cheaper price.

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