News Analysis: Japan's economic soft spot to continue as fundamentals not being addressed: experts

Japan's economy slipping into a technical recession for the second time since Prime Minister Shinzo Abe came to office in 2012 has led some analysts to question the efficacy of his so-called aggressive blend of economic policies dubbed "Abenomics" and see the soft spot continuing unless economic fundamentals are swiftly addressed.

Japan's economy contracted in the third quarter owing to waning business investment and slumping inventories, the government said, with the 0.8 percent contraction in the July-September quarter of 2015 marking a second straight quarterly contraction, following a revised 0.7 drop in the second quarter.

The world's third-largest economy once again entering a recession comes as a blow to Abe and his personalized brand of economic policies, particularly in light of the fact that the prime minister has, since his return to office, pledged to rescue the nation from the doldrums of recession and return Japan to its former economic glory, before it became mired in decades of deflationary pressure and had piled up public debt amounting to twice the size of the nation's GDP and the highest for an industrialized nation.

Economists here while pointing out that the latest GDP figures released Monday came in below market expectations and, in fact, mark the fifth time Japan has been in a recession since the global financial crisis of 2008, have also highlighted the fact that despite both exports and consumption showing an uptick in the latest recording period, businesses here still remain circumspect, as evidenced by negligible wage increases and falling investments, despite a number of major blue chips and mid-sized companies netting record profits in the last quarter.

"The stock market may have been buoyed by 'Abenomics' and the yen has weakened which has given major exporters who rely on overseas profits a boost, but incomes and spending as well as investment remain areas that haven't fully been addressed by the government's policies," said Akihiro Hoshino, a senior quantitative strategist at Nomura Holdings Inc.

"One of the major reasons for the economic contraction this time was because businesses are not investing, in a sign that they are not content with current conditions, as recent data has proved, and until more stimulus measures are unveiled the situation here will remain, at best, tepid," Hoshino said.

The chairman of the Japan Business Federation, or Keidanren, the country's most influential corporate lobby group, Sadayuki Sakakibara, concurred, stating after the data was released Monday that it was now time for further official measures to be introduced to shore up the economy.

"Two straight quarters of decline needs to be taken seriously. The biggest issue is policies to lift growth. We need some kind of stimulus measures," Sakakibara told a press briefing, referring to a new spending package by the government, slated to be in the region of 3.5 trillion yen (28.37 billion U.S. dollars).

Indeed, other economists have also pointed out the need for measures to be taken to increase spending and growth, particularly in light of the prime minister's own GDP target and against a backdrop of slowing economies in the region and Japan's demographic situation, which is leading to ballooning social security costs, as society here simultaneously shrinks and ages.

Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said that further stimulus may be imminent as the prime minister has laid out lofty growth goals of expanding Japan's nominal GDP by 20 percent to 600 trillion yen (4.90 trillion U.S. dollars) over five years, and the BOJ is under increasing pressure to hit a 2 percent inflation target, following decades of deflationary pressure.

"Japan's economy is in a soft patch, and even though it may rebound in the coming months, the momentum will probably be very weak. The government will probably have no choice but to take action to stimulate the economy, and pressure for additional monetary easing will likely build up again," Takeda said.

Takeda added that business spending was unlikely to increase in the near future, owing to concerns about a slowdown in emerging economies, but Japan's Economics Minister Akira Amari has maintained that the economy was on a "moderate recovery path" despite some weakness and that it would continue to improve gradually even though overseas economies "posed downside risks."

Amari added that GDP is likely to expand in the October-December period and may be underpinned by an extra budget for the Trans-Pacific Partnership (TPP) and measures to combat the rising costs of socials security, but fears remain that Abe's maneuvers, in twine with the finance ministry and the central bank, while producing some short-term results, will fail to address the big picture.

"In the short-term the BOJ needs to expand its stimulus measures and pump more money into financial markets and encourage businesses and households to spend more," said Hoshino, adding that "but in order to engineer a more sustainable recovery, longer term solutions need to be found that address comprehensive structural reform and the impending fallout that is coming from the government's passive efforts to deal with the nation's demographic problems."

But while calls have become rife for the BOJ to start the ball rolling by expanding its stimulus measures, the central bank has perplexed many economists by opting last month to stay pat on its policy, with market insiders also believing the bank will leave measures unchanged this month too.

Mari Iwashita, chief market economist at SMBC Friend Securities said that because Monday's GDP data revealed that consumer spending had improved, the negative GDP reading won't prompt the BOJ to act now.

Other economists have painted an even bleaker picture, with Izumi Devalier, an economist at HSBC Holdings Inc., maintaining that even if the bank did roll out additional easing measures, it wouldn't be enough to reverse the decline in capital expenditure marked in the third quarter.

"If record high corporate profits and yen weakness aren't enough to get corporates to invest in Japan, there are clearly deeper-seated forces at work, involving concerns over the country's declining long-term growth potential and increased competition abroad. Another round of quantitative easing is not going to change this," Devalier said.

Takeda, for his part, also believes that the economic situation here may be more severe than the finance ministry and the BOJ is letting on, as companies stopping spending is a sure-fire indicator that prospects ahead, including reflationary efforts, are not good.

The latest GDP data "shows the increasing risk that Japan's economy will continue its lackluster performance. The weakness in capital spending is becoming a bigger concern. Even though their plans are solid, companies aren't confident about the resilience of economies at home and abroad," said Takeda, adding that markets here are now becoming impatient with Abe and the BOJ's tardiness in doing more to prop up the economy.

"The BOJ should act now if they are looking at economic fundamentals: prices are falling and the economy isn't growing, giving no sign for inflation expectations to rise," Takeda concluded. Enditem