Japan’s government lowered its assessment of consumer spending and exports in August, a worrying sign that the economy is seeing just a tepid recovery from a contraction in the April-June quarter.

The government stood by its assessment that Japan’s economy is on track to recover, but acknow-ledged that the pace of improvement is patchy as worries stemming from the bursting of China’s stock-market bubble roil global financial markets.

Turmoil overseas is a grave threat to Japan, as this could undercut policymakers’ efforts to spur inflation with quantitative easing and nurture a flourishing private sector with business-friendly structural reforms.

“The economy is recovering, but recently the pace of improvement has been uneven,” the Cabinet Office said in the report.

“We need to be mindful of downside risks posed by China, other overseas economies and moves in financial markets.”

Consumer spending has reached a plateau, the Cabinet Office said in its monthly report for August, which is a downgrade from last month’s assessment that consumption was showing signs of improving.

That marked the first time in 11 months that the Cabinet Office downgraded its view of consumer spending, according to the report. Consumption has weakened, partially due to a decline in spending on summer clothes and air conditioners as a result of unusually cool weather, the Cabinet Office said.

However, some economists worry that declines in real wages are causing households to become more cautious about spending, which could mean a prolonged slowdown. Exports are weakening, the Cabinet Office said, which is a downgrade from its assessment in July that exports were flat.

The government left unchanged its assessment that capital expenditure is recovering and that industrial production is holding steady.

Global share markets crumbled at the start of this week after Chinese stocks capitulated under intense selling pressure in what traders dubbed a “Black Monday” for financial markets.

Worries that the Chinese government may not be able to prop up the economy have sparked talk of capital flight from a broad range of emerging markets, which could hurt global export demand and weaken Japan’s outlook.

Japan’s gross domestic product contracted an annualised 1.6 per cent in April-June as exports slumped and consumers cut back on spending.

The economy is expected to resume growing in the current quarter, but worries about the global economy could hurt household and corporate sentiment.


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