Japan pulls out of recession

Japan's economy returned to growth in the second quarter, ending its longest recession since World War Two, but analysts warned of a rocky road ahead as the nascent recovery was based on short-term stimulus efforts around the world.

Growth in the world's No.2 economy is likely to continue in coming quarters as companies restock inventories due to exports and government stimulus spending around the world, providing further evidence that the worst of the damage wrought by a global financial crisis may be over.

But economists and policymakers were wary about the outlook for next year because exports, the biggest contributor to growth in April-June, may slow as stimulus measures in other countries wear off.

A deteriorating jobs market is also likely to undermine Japanese consumer spending after government subsidies on energy-efficient cars and home appliances expire. This could delay a recovery in capital expenditure, economists say.

"Today's data was driven by stimulus steps in Japan and overseas, so Japan's economy is far from self-sustaining growth," said Kyohei Morita, chief economist for Japan at Barclays Capital.

"The growth level for the July-September quarter will likely be similar to that of April-June, and the pace of growth is expected to slow down thereafter as the effects of government stimulus run their course.

Gross domestic product grew 0.9 per cent in April-June, slightly short of a median market forecast of a 1.0 per cent increase. That puts Japan in the first camp of G7 countries that have pulled out of recession, along with Germany and France.

That compared with a 0.3 per cent contraction in the United States in the same quarter. The euro zone economy shrank 0.1 per cent after a 2.5 per cent fall in the first three months.

Japan's economy expanded for the first time in five quarters, following a revised 3.1 per cent contraction in January-March and a 3.5 per cent decrease in the final quarter of 2008 -- the biggest drop on record.

On an annualized basis, Japan's economy grew 3.7 per cent from the first quarter, the fastest since January-March 2008.

Inventories cut 0.5 per centage point from Japan's GDP in April-June, more than double a 0.2 per centage-point deficit the previous quarter. This suggests inventories will contribute to growth in the July-September quarter as companies stockpile goods to meet a pick-up in demand at home and abroad, economists say.

But the rise in output isn't likely to translate into higher corporate spending as manufacturers are still operating at around 70 per cent of capacity, economists say.

Capital expenditure in April-June marked five consecutive quarters of contraction, the longest such streak since 1976.