Japan economy contracted 1.2 percent in April-June quarter, China to weigh on recovery

Japan's economy contracted at a 1.2 percent annual rate in the April-June quarter, according to revised data Tuesday, as economists warned China's slowdown and financial market turmoil might weaken an expected recovery in the second half.

The figure was better than the preliminary estimate last month of a 1.6 percent contraction but economists said the general trend is weak.

"The details were hardly reassuring," Marcel Thieliant of Capital Economics said in a commentary. Corporate investment fell 0.9 percent.

He expects growth to be positive but tepid in the current quarter.

Public investment and private residential investment were the strongest areas of growth in the April-June quarter. Revisions to tax laws have led many property owners to raze old houses for reconstruction, helping boost housing starts.

But other areas such as auto registrations and industrial production have been lackluster. China's slowing growth has also cast a pall on the outlook for exports in coming months.

"We recognize the downside risk to our growth forecast, with continuing disappointing news from Asian neighbors and recent market turmoil," Masamichi Adachi of JPMorgan said in a research note. He said he expects the economy to still recover in the second half of the year.

"In all, we continue to think that domestic demand is firming, but external demand may be weaker than we currently anticipate," he said.

Domestic demand was essentially flat in the April-June quarter. On a quarterly basis, the economy contracted 0.3 percent versus the earlier estimate of a 0.4 percent contraction.

The government hopes to boost growth through inflation, but sluggish wages and exports have frustrated that effort.

Employee compensation fell 0.2 percent in April-June.

Japan's fiscal year begins in April, so public spending tends to be highest in the spring, as construction projects resume or get underway.


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