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Japanese Economy Contracts

Hit by faltering exports and wilting consumer demand, Japan is beginning to succumb to the onslaught of rising commodities prices and global economic turmoil.

TOKYO (AP) -- Japan's economy shrank for the first time in a year in the second quarter, the government said Wednesday, but officials -- joined by many economists -- denied the downturn heralded a return of the "lost decade" economy of the 1990s.

Hit by faltering exports and wilting consumer demand, the world's No. 2 economy, which until now had managed to power forward, is beginning to succumb to the onslaught of rising commodities prices and global economic turmoil.

Whether Japan has indeed entered recessionary territory remains up for debate, but economists generally agree that the current downturn won't be as deep or as long as the economic malaise that crippled the country in the 1990s. They cite healthier fundamentals than in the past, when Japan faced excess debt, labor and capacity.

Japan's gross domestic product, or the total value of the nation's goods and services, dropped at an annual pace of 2.4 percent in the April-June period, a marked fall from a 4.0 percent rise registered in the January-March quarter.

The new numbers -- the first negative reading in four quarters -- bolstered growing evidence that Japan's six-year expansion was over.

Glen Maguire, chief Asia economist for Societe Generale, said Japan is "tracking to a lower growth profile," but stopped short of calling it a technical recession -- commonly defined as two straight quarters of contraction.

"I don't think the numbers are signaling the type of deep recessions we saw in the late 1990s and early 2001," Maguire said. "Any slowdown in the Japanese economy is likely to be relatively modest."

On a quarterly basis, GDP contracted 0.6 percent, after a 0.8 percent increase in the January-March period, the Cabinet Office said in its preliminary report. Private consumption, which accounts for more than half of real GDP, dropped 0.5 percent from the previous quarter. Housing investment was down 3.4 percent.

Two main drivers of Japan's six-year economic recovery -- business investment and exports -- also deteriorated. Corporate capital investment in factories and equipment fell 0.2 percent from the previous quarter, while overall exports of goods and services slid 2.3 percent -- lower for the first time in 13 quarters.

While acknowledging the "downward risks" facing the economy, Economy Minister Kaoru Yosano told reporters that the contraction is unlikely to be a long-term trend and should be evaluated "optimistically."

The latest figures, which had been widely expected, followed a series of recent sluggish economic indicators.

The government's monthly economic report for August released last week described the economy as "weakening." Although the Cabinet Office refrained from using the term "recession," it left out any reference to an economic "recovery" for the first time in more than six years.

Industrial production was down 2.2 percent in June from the previous month, and slowing demand overseas is battering Japanese exporters.

In data released separately Wednesday, Japan's current account surplus -- the widest barometer of its trade with the world -- plummeted 67.4 percent from a year earlier to 493.9 billion yen ($4.52 billion) as exports declined and higher oil prices pushed up the import bill.

The country's top automaker, Toyota Motor Corp., said last week its fiscal first-quarter profit plummeted 28 percent, and the automaker stuck to its forecast that full-year profit will fall for the first time in seven years as it faces more problems from a weakening North American market and rising material costs.

Domestically, rising inflation is sapping consumer sentiment, with July's consumer confidence index falling to its lowest level since the government began tracking the data in 1982.

Takehiro Sato, chief economist at Morgan Stanley in Tokyo, expects personal consumption to bounce back in the current quarter, as hot weather spurs sales of summer-related products.

But slowing exports will continue to weigh on the Japanese economy in the months ahead, he said, predicting flat or negative growth in the October-December and January-March quarters.

"The recession has only begun," Sato said.

Japanese officials scrambling to control the fallout on Monday released a draft framework of an emergency economic stimulus package designed to help the country cope with high fuel and commodity prices.

Measures include financial assistance for small and midsize firms, subsidies for industry to improve energy efficiency and highway toll discounts. It did not provide further details, including the scale and total value.

But leaders of the ruling Liberal Democratic Party and its coalition partner Komei party agreed Wednesday to work to submit a draft of a large-scale supplementary budget at the next parliamentary session, expected to begin in September, according to Japanese media reports.

Citing some in attendance, public broadcaster NHK said the supplementary budget could be as much as 1 trillion yen ($9 billion).

More certain are the Bank of Japan's plans, which many economists agree are likely to factor in the slowing economy more so than rising inflation. When the central bank policy board meets next week, it is expected to keep its key interest rate unchanged at 0.5 percent.

Japanese stocks fell sharply following the release of the GDP numbers in the morning. The benchmark Nikkei 225 Stock Average lost 2.21 percent, and the broader Topix index closed down 1.96 percent.

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