Japanese Economy Slowing Down : 2nd-Quarter Dip in GNP--First in 2 Years--Is Welcomed

Japan’s economy shrank in the second quarter of 1988, marking the first decline in two years, but analysts welcomed the news, saying a slowdown was necessary to ensure longer-term health.

Japan’s Economic Planning Agency reported Tuesday that its gross national product, adjusted for inflation and seasonal factors, contracted 1% after an exceptional 2.7% climb in the January-March quarter.

“We have been hoping for a moderate growth rate without inflation,” said economist Masaru Takagi of Fuji Bank. “The economy had expanded very dramatically in the first quarter of this year and if this condition had continued, sooner or later inflation would have occurred.”

Agency officials said a 1.5% decline in foreign demand for Japanese products and services and a downturn in private housing investment over the previous quarter’s levels more than offset a modest growth in domestic personal consumption and private capital investment.

The greatest declines were in the yen value of exports of televisions, videotape recorders, radios and motor vehicles, they said. The Japanese yen has risen by about 83% against the U.S. dollar in the past three years, making Japanese products more expensive overseas.

But despite the downturn from healthy GNP growth levels in previous months, agency officials said Japan’s economy remained fundamentally strong.

“It’s still showing a positive progression overall,” said one official, who requested anonymity.

“There’s no reason to think that Japanese economic expansion has ended,” said Kenji Ito, senior economist for the Industrial Bank of Japan. “The fall in housing investments is a little steeper than expected, but on the whole we thought the numbers would be in this range.”

Economists have been especially worried that brisk consumer and corporate demand was pushing production by many Japanese manufacturers to the limit, thereby putting upward pressure on prices.

So far, Japanese inflation has been low, but economists say strong demand is encouraging higher wages and higher prices of raw materials for manufacturing.

A senior government economist said the Japanese economy should resume growing in the current July-September quarter, leading to an annual growth rate of about 4% for the financial year ending next March 31.

The government’s official GNP growth target for the financial year is 3.8%, but many private economists say the government’s predictions are too conservative.

Hidehiro Iwaki, economist for Nomura Research Institute, said the economy was likely to grow 4.5% to 4.8% in the current fiscal year and possibly more than 4% next year. “Basically, the trend is toward expansion,” he said.

Many other economists said they see the growth rate for the fiscal year at about 5%.

Consumer spending, which makes up the lion’s share of the economy, also slowed to an inflation-adjusted 0.6% gain in the April-June quarter from its sharp 2.5% jump the previous quarter, economists said.

Nevertheless, corporate investments in plant and machinery grew 4.6% in the April-June quarter.