50% Chance Of Recession In Japan: Goldman

Source : The Business Times, January 11, 2008

View contrasts with upbeat reports from World Bank, OECD on major economies

JAPAN'S economy could follow that of the US into recession this year, investment bank Goldman Sachs warned yesterday, underlining a growing gulf between analysts in the private and public sectors over prospects for the global economy in 2008.

A senior Bank of Japan official, meanwhile, acknowledged that Japan's positive economic cycle is weakening, and that risks to global growth are also increasing.

Goldman Sachs advised clients that there is now an at least 50 per cent chance that Japan's economy will slip into recession in 2008, meaning that growth would turn negative for at least two consecutive quarters. A day earlier, the leading US investment bank had predicted that America could suffer a recession this year, because of weaker consumer spending and a tumbling housing market.

These and other bearish views expressed by leading investment houses contrast with upbeat recent reports from the World Bank and OECD arguing that major economies can avoid recession in the wake of the sub-prime mortgage crisis.

A similarly optimistic note was sounded yesterday by the Institute of International Finance (IIF) in Washington, which said that recession should be avoidable in the US and Japan.

'A difficult environment featuring continual credit market tensions and highly elevated oil prices should contribute to a slowdown in the global economy this year,' the IIF suggested. 'However, a recession in the United States is likely to be avoided, while emerging market growth is seen as remaining strong,' said the institute, which speaks on behalf of 370 leading financial institutions around the world.

Goldman Sachs, meanwhile, cut its forecast for growth in the Japanese economy this year to just 1 per cent overall, taking into account an expected shrinkage in the US economy during the second and third quarters of this year.

Goldman also said that it expects the Bank of Japan to keep interest rates on hold throughout this year and into 2009.

BOJ deputy governor Toshiro Muto declined to say when the bank will move on interest rates but he rejected speculation that the BOJ might be forced to lower its short-term policy lending rate (currently at 0.5 per cent) to fend off possible recession. 'The positive cycle of output, income and expenditures is weakening temporarily,' he said 'But I don't think the mechanism itself will break,' he added.

The IIF suggested in its report that Japan's economy will slow to 1.3 per cent real growth this year from an estimated 1.9 per cent in 2007. It claimed that the Japanese economy is supported by 'healthy levels of business confidence', a strong labour market and a banking system that is 'relatively immune from the turmoil affecting in the United States and Europe. The institute forecast GDP growth of 2.3 per cent this year for the US and 2.2 per cent for the euro area.

For emerging markets, the IIF said that 'the main factor pushing growth slightly lower in 2008 is the effect of tighter monetary policies put in place by many emerging market central banks through 2007.

'For example, monetary tightening in China is likely to contribute to a slowdown in growth to 10.5 per cent from 11.5 per cent in 2007. Elsewhere in Asia, growth in India should be stable, and an acceleration is in prospect in Thailand and the Philippines.'

The IIF said that the volume of net private capital flows to emerging markets in 2007 reached a record of US$681 billion, compared to US$560 billion in 2006.

This reflects 'sustained momentum in flows to emerging markets, despite the turmoil in mature credit markets in the second half of the year. The flow of equity capital remains robust, and diminution of commercial bank lending to emerging markets looks to have been remarkably limited to date.'