Japan’s Economy Contracts Further; More Fiscal Intervention Seen

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September 9, 2011 4:58 PM EST

Japan's economy shrank further and faster than the government's initial estimates in the second quarter as the stronger yen hindered efforts to recover since the March earthquake.

Capital spending for reconstruction slowed down during the quarter, bringing the gross domestic product at an annualized 2.1 percent rate in the three months ended 30 June. This has been revised downward from the 1.3 percent reported last month.

The news prompted newly installed Finance Minister Jun Azumi to anticipate more fiscal intervention to arrest the impact of the strong yen on the economy. He is set to appeal to the members of the Group of Seven world finance leaders later on Friday meeting at Marseille, France. The yen had risen to a postwar high of 75.95 per dollar on Aug. 19.

The other Group of 7 countries, which include the U.S., E.U.-member countries like France and Germany, can actually intervene in the currency markets to nip the rising value of the Japanese yen. They made a similar concerted effort of fiscal intervention in April, after the disasters.

A Tokyo-based economist for Meiji Yasuda Life Insurance, Yuichi Kodama, said in related news that companies cutting down on spending plans will not result in a rebound in GDP in the third quarter, and an even slower recovery was likely.

Yoshikiyo Shimamine of Dai-Ichi Life Research in Tokyo told Reuters there is yet to be a basis that the economy will bounce back in the third quarter because the country still languishes with the impacts of March 11.

Takahide Kiuchi, chief economist for Nomura Securities in Tokyo, told AFP that Japan's economic downturn suggests a weak recovery in corporate capital spending, but a positive impact on the economy as public investment for reconstruction has been revised upward.

Dai-Ichi Life Research's Shimamine concluded that the equity markets are now banking on a more positive outlook for the fourth quarter.

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