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 Official data on Monday showed the world's third-largest economy
shrank an annual 0.8 percent in July-September after a 0.7 percent
contraction in the prior quarter, putting it firmly into recession -
two consecutive quarters of declines.
Monday's data highlights the need, analysts say, for structural
reform aimed at breaking through supply-side constraints including
labor shortages in a fast-ageing society, which suffered from
chronic deflation for more than 15 years.
"Abenomics' first two arrows of monetary and fiscal stimulus were
meant to buy time, but Japan failed to make progress with painful
reforms needed to boost its growth potential," said Hiroshi
Shiraishi, senior economist at BNP Paribas Securities.
"Without reform (the 'third arrow'), the economy's growth potential
remains low, making it vulnerable to shocks and to suffering
recessions more often."
Economics Minister Akira Amari, at a news conference after the data
was published, noted a shortage of labor available for public works
projects to stimulate the economy, highlighting a major constraint
policymakers face - not enough suitable workers to build growth.
Amari nodded when asked if he saw "no need" to craft an extra budget
to stimulate demand right away, despite U.S. Treasury Secretary Jack
Lew proposing earlier that Japan should provide more fiscal support
to ensure it returns to growth - led by domestic demand.
Amari urged Japanese firms to use their record cash holdings to
raise wages and boost capital spending to generate a virtuous circle
of growth led by the private sector, instead of simply demanding yet
more stimulus when such growth remained elusive.
But Amari was targeting a corporate sector that has shown little
enthusiasm for Japan's economic prospects of late.
The Reuters Tankan sentiment index for manufacturers last week fell
in November from October, posting the lowest reading since April
2013. The service sector index fell in October to its lowest since
March, dragged down by wholesalers and retailers.
SOME BRIGHTER SIGNS
Even though Monday's numbers were gloomy, the government maintained
its cautiously upbeat outlook, saying that despite some weaknesses,
the economy continued to recover moderately on improvements in job
and income conditions.
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"While there are risks such as overseas developments, we expect the
economy to head toward a moderate recovery thanks to the effect of
the various (stimulus) steps taken so far," Amari said in an earlier
statement.
Amari said a big reduction in inventories was the major culprit in
the third-quarter contraction. Excluding this effect, he said, final
demand contributed an annualized 1.4 percent point to growth.
But capital expenditure fell 1.3 percent, more than a median market
forecast of a 0.4 percent decrease, to mark a second declining
quarter, and revealing the sluggish state of manufacturing
investment.
Private consumption, which accounts for about 60 percent of gross
domestic product, rose 0.5 percent from the previous quarter, in
line with the median market forecast.
While domestic demand shaved 0.3 percentage point off GDP growth,
foreign demand for Japan's exports added 0.1 point, the data showed.
The weak data would have come as little surprise to Bank of Japan
officials, who had also largely factored in the recession, and now
expect growth to recover in coming quarters as consumption and
factory output show signs of a pick-up, however modest.
The data will be closely scrutinized by the Bank of Japan, but board
members are widely expected to keep monetary policy steady at the
central bank's rate review this week, analysts said.
(Additional reporting by Stanley White and Chang-Ran Kim; Editing by
Eric Meijer)
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