Japan Could Be In Recession Already: Goldman

Source : The Straits Times, Jan 29, 2008

Slowdown due more to slump in domestic demand than US economic weakness

TOKYO - JAPAN has probably fallen into recession, ending the nation's longest period of growth in more than 60 years, according to Goldman Sachs Group.

Factory production will fall from a fourth-quarter peak, while consumer spending and the construction industry are slowing, Mr Tetsufumi Yamakawa, Goldman's chief Japan economist, wrote yesterday in a report.

'The recession is a product not of an anticipated recession in the US triggered by the subprime loans problem, but a slump in domestic demand,' Mr Yamakawa said.

Sluggish spending by households leaves the economy more dependent on overseas markets just as cooling United States demand threatens to spread to Asia, where Japan sells half its exports. Shipments overseas rose at the slowest pace since 2005 in the fourth quarter of last year, according to Bloomberg data.

The decline in industrial output ends six years of increases that fuelled corporate investment and hiring, Mr Yamakawa said. A slowdown in export growth, the engine that drove the economy's third-quarter expansion, is becoming more pronounced, he added.

Shipments to China, when measured by volume, grew in the fourth quarter at half the pace of the previous period, according to Goldman. Exports to the US fell in each of the last four months of last year.

Housing starts have plunged in the five months since June because of a permit logjam caused by new government regulations. The slowdown, the worst in 40 years, brought an apology from Prime Minister Yasuo Fukuda and prompted the central bank to cut its evaluation of the economy for the first time in three years.

The Bank of Japan may lower its key interest rate from 0.5 per cent this year, according to overnight interest-rate swaps trading. Investors see a 58 per cent chance of a cut by July, calculations by JPMorgan Chase show.

'It appears highly likely that the economic expansion that has continued for nearly 70 months since early 2002 has come to an end and the economy has entered a recession for now,' Mr Yamakawa said in the report.

Japan has had three recessions since the country's stock and property bubble burst in the early 1990s.

The first lasted 32 months from March 1991 to October 1993 and the second dragged on for 20 months from June 1997 to January 1999.

The most recent recession was in the 14 months from December 2000, when the bursting of an information technology bubble dampened exports and capital investment. -BLOOMBERG NEWS