Japanese economy contracts in second quarter

Japan released a disappointing second quarter economic report yesterday. Bloomberg reports:

Japan's economy contracted at almost twice the pace forecast by analysts in the second quarter, reinforcing speculation the central bank will leave interest rates unchanged this year.

The economy shrank at a 1.2 percent annual rate in the three months ended June 30 as business spending slumped, the Cabinet Office said in Tokyo today. The government initially forecast a 0.5 percent expansion...

Japan's economy contracted 0.3 percent from the previous quarter...

But perhaps that's just payback for the strong first quarter.

Even after the contraction, Japan's economy expanded at a 2.5 percent annual pace in the first two quarters, the government said, higher than the economy's potential growth rate of 2 percent.

The economic difficulty may be lingering in the third quarter, according to another Bloomberg report yesterday.

Sentiment among Japan's barbers, shopkeepers and other merchants on the front lines of the economy dropped to a four-year low in August as consumer spending slowed and financial markets slumped.

The Economy Watchers index, a gauge of domestic demand, fell to 44.1 points, the fifth straight decline, from 44.7 in July, the Cabinet Office said today in Tokyo...

On the other hand, other data have been more positive, for example on bank lending yesterday.

Growth in Japanese bank lending accelerated for the first time in eight months in August as property-related financing expanded.

Loans excluding trusts rose 0.5 percent from a year earlier, the Bank of Japan said in Tokyo today, quickening from a 0.3 percent gain in July. Lending adjusted for currency fluctuations, bad loan write-offs and securitizations increased 1.3 percent compared with a revised 1.2 percent in July.

But perhaps more importantly, Bloomberg reports today that the second quarter setback in investment spending may be short-lived.

Japan's machinery orders surged at three times the pace forecast by economists in July, easing concern the economy is ailing after last quarter's contraction.

Orders surged a seasonally adjusted 17 percent to 1.12 trillion yen ($9.9 billion) from June, the Cabinet Office said in Tokyo today. The median estimate of 38 economists surveyed by Bloomberg News was for a 5 percent rebound from June's 10.4 percent slump.