The economy shrank a real 1 percent during the July-September quarter compared with the previous term, according to gross domestic product figures released Monday by the Economic Planning Agency. The quarterly slide in GDP, the broadest gauge of economic activities, translates into an annualized shrinkage of 3.8 percent. While the negative rate — after two straight quarters of growth — looks bad, economists said the overall trend is of a modest recovery. They pointed to the fact that, on a half-year basis, the April-September period saw the GDP figures jump by more than 1 percent compared to the previous six months. EPA officials said that the government goal of 0.6 percent growth for the current fiscal year is within reach. “We can attain the 0.6 percent growth rate even if the economy contracts by 0.3 percent during each of the remaining (two) quarters,” EPA Chief Taichi Sakaiya told a news conference after the GDP announcement. “If we post zero growth twice, the growth rate for the year would be 0.8 percent.” He said economic conditions are not that bad because the seasonally adjusted GDP figures for the previous quarter came out better than first reported. Finance Minister Kiichi Miyazawa attributed the GDP contraction to an upward revision of growth in the April-June quarter. “I’m not surprised by the 1 percent contraction from the previous quarter,” Miyazawa said. “This is because growth in the previous quarter was revised sharply upward.” The EPA originally announced that the economy grew a real 0.1 percent during the April-June period, but the seasonally adjusted figures showed the economy actually grew by 1 percent during that period, the officials said. Nevertheless, the results indicate that despite massive government spending to prop up the economy, a solid recovery is still not in sight. The dismal figures are largely attributable to sluggish domestic demand, which pushed the GDP down by 1.3 percent. But the damage was somewhat mitigated by a 0.4 percent rise in external demand, helped by a surge in exports, especially to other parts of Asia. Private consumption shrank 0.3 percent from the previous quarter, logging the first decline in three quarters. EPA officials noted consumers spent more of their income during the first half of this year but that their income declined. They added that consumption will not rise in the long term without an increase in income. The EPA said it has revised growth in the January-March term down to 1.5 percent, or an annualized pace of 6.3 percent, from 2 percent. Growth in the April-June period was revised up to 1 percent, or an annual rate of 3.8 percent, from 0.1 percent. Real GDP data, covering the value of the country’s total output within its borders, are adjusted for inflation and seasonal variations. Prime Minister Keizo Obuchi said the government will make efforts to achieve the 0.6 percent growth target. “The figure is only a figure,” he said. “We will strive to attain our annual target.” Citing the expected effects of a 6.79 trillion yen second supplementary budget for the current fiscal year, Vice EPA Minister Takashi Nakanomyo said the GDP will probably not shrink by more than 0.3 percent in either of the next two quarters. The auxiliary budget is expected to be approved by the Diet Thursday. The measure is intended to finance the core part of an 18 trillion yen economic stimulus package unveiled last month. In the reporting quarter, corporate investment in equipment fell 2.1 percent, reflecting a reluctance by many corporations to make new investments even though their business sentiment has been improving, the officials said. Private housing investment dropped 3.2 percent after surging 12.9 percent in the April-June period thanks to a series of government measures, including tax incentives, for new home buyers. Public investment also fell by 8.5 percent from the previous quarter, though the level of public works spending remains high, posting a 12 percent rise compared with the July-September period last year, according to the EPA. Total GDP for the July-September period came to an annualized 482.81 trillion yen in real terms, compared with 487.50 trillion yen in the April-June quarter. Akio Makabe, chief economist at Dai-Ichi Kangyo Research Institute, said the 2.1 percent fall in corporate investment in plant and other equipment cannot be taken at face value, adding that there is a statistical bias in the preliminary figures released Monday. The statistics on corporate investment the EPA used in calculating the preliminary July-September growth cover firms capitalized at 100 million yen or more, he said, pointing out that the final figures on capital investment would also reflect the activities of smaller firms. The recovery of the nation’s fragile economy over the medium term hinges on how much corporate investment will improve, he said. “As restructuring pressures remain strong, it is unlikely that personal consumption will go up over the next year or so,” Makabe said. “Unless firms start investing again, the chance of a self-sustained economic recovery is dim.” Meanwhile, the Y2K millennium computer bug concerns, often mentioned in a negative context, might positively affect the economy during the October-December period, said Hideya Kubo, senior economist at NLI Research Institute. Firms are likely to increase their inventory during the yearend season to prepare for potential Y2K-related problems, which would help push up the GDP, he said. If individual consumers rush to store goods, that would work as a plus for the GDP as well, he added.

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