Japan’s economy nearly stalled in the second quarter amid falling exports and weak corporate investment, showing the nation is still largely dependent on government stimulus for growth.

The economy expanded an annualized 0.2% in the April-June quarter, weaker than a 2% expansion in the first three months of the year, Japan’s government said on Monday.

The economy would have contracted in the quarter were it not for a rise in public investment. The government front-loaded infrastructure spending in the quarter, the first of Japan’s fiscal year. Prime Minister Shinzo Abe’s cabinet in early August approved a ¥28 trillion ($276 billion) stimulus package that includes ¥15,000 handouts to 22 million low-income people, so the government spending should continue in the latter part of the fiscal year.

“I expect exports to remain slow ahead, but for more public spending to support growth,” said Hidenobu Tokuda, an economist at Mizuho Research Institute. “Fundamentally, Japan’s growth potentially has fallen. That means the government needs to continue with structural reforms, not just stimulus.”

Business investment fell for the second straight quarter, while exports dropped an annualized 5.9%. Exports of ships, steel product and oil-related goods fell. U.S. and European demand for Japanese goods weakened, said a government official briefing reporters on the data.

Economists said a strengthening of the yen against other major currencies since the beginning of the year has hit exports.

Household spending also was nearly flat. Consumer spending makes up roughly 60% of Japan’s gross domestic product. Economists say consumers have held back on spending because many haven’t received significant pay increases, despite record earnings at many large Japanese companies in recent years. Total compensation received by Japanese employees increased 0.3% from the previous quarter.

Source: WSJ