Japan's gross domestic product declined 2.9% in the second quarter, or an annualized contraction of 11.2%, the biggest fall since the oil price crisis in 1974.

A sharp slump in personal consumption in the wake of a controversial tax rise, increased social welfare costs and continuing uncertainty about the economic outlook were largely to blame for the sharp fall in GDP between April and July.

The fall far exceeded government and private economists forecasts. Shimpei Nukaya, administrative vice-minister of the Economic Planning Agency, said the drop made it difficult for Japan to achieve the government's target of 1.9% annual growth.

But Finance Minister Hiroshi Mitsuzuka said the sharp contraction was mainly the result of fiscal reform, referring to the hike in the consumption tax that took effect in April. He said he expected growth to accelerate in the second half of the year.

The poor performance is likely to strengthen pressure on the government to stimulate domestic demand when the Group of Seven finance ministers meet in Hong Kong next week.

Separately, a senior U.S. official attending bilateral trade talks in Tokyo said Japan's rising trade surplus with the U.S. was adversely affecting trade relations between the two countries. The official said Japan was increasingly relying on export-led growth and excessive regulation and anti-competitive practices to guard its home markets.

Mitsuzuka acknowledged the recent sharp rise in the Japanese current account surplus would be discussed at the G7 meeting, but said he would explain to other finance ministers that the rise in the surplus is probably over.

Japan's second-quarter GDP figures depict an economy depressed by weak domestic demand and supported largely by exports.

Domestic demand pushed real GDP down 4%, while exports boosted it by 1%. This is likely to fuel criticism among Japan's trading partners that Tokyo, aided by a weak yen, is exporting its way out of the economic slump.

	This Information System is provided by the University of Toronto Library and the G7 Research Group at the University of Toronto.
	Please send comments to: g8@utoronto.ca Revised: February 11, 1998.

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