Japan On Brink Of Recession As Economy Shrinks

Source : The Straits Times, August 13, 2008

TOKYO - JAPAN said on Wednesday its economy contracted in the second quarter as falling exports and weak consumer spending sent Asia's largest economy hurtling toward its first recession in six years.

The slump reflects the rapidly deteriorating global economic climate, with fears of a recession in the eurozone also mounting as the fallout from the US financial crisis ripples around the world.

Japan's gross domestic product (GDP) shrank by 0.6 per cent in the three months to June from the previous quarter, the Cabinet Office said, marking the first time in a year that the world's second-biggest economy has contracted.

The economy shrank by 2.4 per cent on an annualised basis, matching market expectations.

The slump put Japan on the cusp of outright recession, which is usually defined as two or more straight quarters of economic contraction. The last time that happened in Japan was in 2001, when the recession lasted for three quarters.

Tokyo share prices slumped 2.1 per cent as the weak growth figures added to jitters about problems in the US banking sector.

GDP growth for the first quarter of 2008 was also revised down to 0.8 per cent quarter-on-quarter from 1.0 per cent previously.

Economic growth 'will remain very weak throughout this fiscal year,' said Mamoru Yamazaki, chief economist for Japan at RBS Securities.

'The increase in oil and commodity prices is damaging corporate profits,' while rising inflation is hurting households, he said.

After suffering a series of on-off recessions in the 1990s following the bursting of the economic bubble, Japan had been slowly recovering on the back of brisk exports and business investment.

Japan's government, however, last week effectively declared an end to the country's longest period of economic expansion in postwar times.

Even so, the economy is considered to be in much better shape than it was during previous downturns, particularly the corporate sector which has benefitted from several years of bumper earnings.

'The fundamentals of the economy are much better than in the previous post-bubble cycles,' Lehman Brothers chief Japan economist Kenichi Kawasaki wrote in a note to clients.

'The downside risks remain elevated, but we expect that this cyclical downturn will be a relatively mild one.' Japan is not the only major industrialised nation to have suffered an economic contraction this year - Canada's economy shrank in the first quarter and Italy suffered negative growth in the second quarter.

The US economy also shrank slightly in the fourth quarter last year but has since been bolstered by stimulus measures.

While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3 per cent.

While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3 per cent.

Household spending fell 0.5 per cent as soaring commodity and food prices, coupled with sluggish wages, prompted consumers to tighten their purse strings.

Business investment was another weak spot, dropping 0.2 percent as cautious companies spent less on new equipment and factories.

Reflecting a slowing global economy, Japan's current account surplus plunged 67.4 per cent in June from a year earlier to 493.9 billion yen (S$6.3 billion) as exports to the United States and Europe fell, official data showed on Wednesday.

The trade surplus alone tumbled 81.3 per cent to 252.1 billion yen.

Given the gloomy economic situation, analysts do not expect the Bank of Japan to raise its super-low interest rates from the current level of 0.5 per cent any time soon, despite the highest inflation in a decade.

'It's very hard for the BoJ to move despite the increase in prices,' RBS Securities' Yamazaki said. -- AFP