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. Last Updated: 07/27/2016

Japan Forges Ahead, Ignores Contraction

TOKYO -- Japan's economy contracted sharply in the second quarter, but economists and investors remained confident the country's budding recovery could absorb the fall.

Monday's announcement that Japan's gross domestic product shrank 1 percent in the July-September quarter comes after two consecutive quarters of growth and was a larger contraction than many economists had forecast.

Even so, Japan's main stock index gained heavily just minutes after the announcement and officials said the figures were not as bad as they might at first look.

"The July-September GDP data seem weak at first glance, but I think the state of the economy is bright overall," Japan's economic planning chief Taichi Sakaiya told reporters.

Experts attributed the contraction largely to technical reasons such as the factoring in of revisions in GDP growth for the previous quarter. They said the data even contained signs of economic health.

"Without the revisions, economic growth would have been flat," said Jesper Koll, chief economist for Merrill Lynch Japan. "If you look at the details, the data is actually quite encouraging."

He said consumer spending, which fell 0.3 percent in the second quarter, would have slumped much more if Japan's economic prospects weren't good.

"Consumer spending was basically flat," Koll said. "That comes in an atmosphere of extreme corporate restructuring and where some companies cut summer bonuses by 5 percent."

A downturn was expected because the effects of public spending measures that fueled economic growth in the previous two quarters are wearing off.

Japan's strong economic performance in the last two quarters had raised hopes that Prime Minister Keizo Obuchi will be able to fulfill his promise of delivering 0.5 percent GDP growth this fiscal year, which ends in March. If calculated by the calendar year, the July-September figures would be considered the third quarter.

After hearing Monday's figures, Obuchi said the government hasn't given up on achieving that target.

"Numbers are numbers, but through policies I will work to achieve our fiscal year growth targets," Obuchi said in parliament.

The economy grew by 0.1 percent in the April-June quarter, after surging 2 percent in January-March. At an annual pace, Japan's economy shrank 3.8 percent in the July-September quarter.

Analysts said the worst news in Monday's economic data was that corporate investment fell 2.1 percent. But they remained bullish about Japan's overall economic prospects.

"Capital spending orders seem to have bottomed out and should be rising next year," said Peter Morgan, an economist at HSBC Securities. "Exports continue to get stronger, especially in Asia."

Morgan said he expects slight growth in the next two quarters and an expansion for the full fiscal year.

Japan's benchmark stock index gained 0.76 percent by the end of trading. Analysts said investors were cheered by an overnight rise on Wall Street and had already factored in a steep fall in GDP.

Monday's numbers initially boosted the dollar against the yen, but the greenback retreated in the afternoon after investors concluded the GDP data wasn't as bad as it first seemed.

Last month, Japan's Cabinet announced a plan to take on a record amount of debt to help finance an 18 trillion yen ($172.5 billion) supplementary budget to boost the economy.