Now Japan bounces out of the recession

Japan's economy climbed out of year-long recession in the second quarter, the government said Monday, expanding 3.7 per cent at an annual pace and joining Germany, France and other regions that appear to be emerging from the global financial crisis.

But economists and politicians sounded cautious, noting that the main driver of growth was exports and that domestic consumer spending remained fragile amid plunging incomes and rising unemployment.

The recovery in the April-June quarter was driven by robust demand for cars, video recorders and other electronics goods, according to government data. Shipments to China and other emerging markets were particularly strong, although exports to the U.S. and Europe also showed modest recoveries. Exports grew 6.3 per cent from the previous quarter, the highest rate in seven years.

Government stimulus measures have also helped, such as cash handouts and incentives to buy ecological products.

But economists said the nascent recovery could quickly run out of steam because domestic demand remains weak. Salaries are falling and the unemployment rate has risen to a six-year high of 5.4 per cent as companies such as Toyota Motor Corp. and Sony Corp. have cut thousands of jobs.

"When you look at the numbers, the contrast between external demand and internal demand is as clear as night and day," said Hiroshi Watanabe, economist with Daiwa Institute of Research in Tokyo. "With payments falling, it's really hard to expect individual spending to hold up."

During the quarter through June 30, compensation for employees dipped 1.7 per cent, the data showed, while consumer spending edged up a tepid 0.8 per cent.

Investors sent stocks plunging on dismay the numbers weren't even stronger and on anxiety about Friday's weak U.S. consumer confidence report. The Nikkei 225 lost 3.1 per cent to finish at 10,268.61.

The rebound in the world's second-largest economy came after a steep, yearlong contraction in gross domestic product, including a worst-ever drop in the final quarter of 2008, when the economy shrank at a 13.1 per cent pace.

The news from Japan comes amid signs that the global economy may be recovering from its slump. Last week, France and Germany, Europe's two biggest economies, said they resumed growing in the second quarter, while Hong Kong also said it expanded after a yearlong recession.

But economy and fiscal policy minister Yoshimasa Hayashi warned that "risk factors" remain, including high unemployment and sluggish production.

"Production is still at a low level, and worries remain that employment conditions will worsen. So we must watch the downside risks," he said on nationally televised news.

Private capital investment slid 4.3 per cent from the previous quarter, while housing investment plunged 9.5 per cent, the government said.

Compared to the previous quarter, Japan's GDP expanded 0.9 per cent in April-June. If that rate were maintained for a full year, the economy would grow 3.7 per cent.

That was better than the 3.0 per cent rate projected by the Economic Planning Association, a government-affiliated group of economists.

Also Monday, the government said in revised data that the economy had contracted 3.2 per cent in the fiscal year through March 31, following 1.8 per cent growth in the previous fiscal year, ending March 2008.

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