Japan Economy Contracts More-Than-Expected 1%

Japan’s economy shrank more than expected in the second quarter of the fiscal year after two quarters of expansion, the government said Monday.

The figures for July through September dealt a blow to the country’s hopes that it had overcome its worst economic problems in decades.

Japan’s Economic Planning Agency said the country’s gross domestic product contracted 1% in the three months ended Sept. 30. That would translate to an annualized shrinkage of 3.8%.

Some economists had predicted 0.1% contraction in gross domestic product, which measures the output of goods and services.

A downturn was expected because the effect of government spending measures has worn thin and consumer spending has been stagnant.

Japan’s strong economic performance in the preceding quarters had raised hopes that Japanese Prime Minister Keizo Obuchi would be able to fulfill his promise of delivering 0.5% economic growth this year.

The economy grew 0.1% in the April-June quarter after surging 2% in the January-March period.

Before the announcement, economic planning chief Taiichi Sakaiya said growth in the July-September quarter would be “difficult.” He also said the government was confident it could engineer growth for the entire year if the contraction was less than 0.5%.

Last month, Japan’s Cabinet announced a plan to take on a record amount of debt to help finance a $172.5-billion supplementary budget to boost the economy.

The package is aimed at helping Japan’s economy grow this fiscal year for the first time in three years, but it has raised fears that it will merely add to the budget deficit without sparking the confidence needed for a real economic recovery.

In trading early today in Tokyo, the Nikkei-225 stock index jumped 239.28 points, or 1.4%, to 18,619.06. Many investors remain optimistic. The GDP news sent long-term Japanese bond yields lower and pushed the yen lower against the dollar--both positive developments for the stock market.