Japan economy eyes two straight yearly falls in crisis

By Yasuhiko Seki

TOKYO (Reuters) - Japan's economy is expected to contract for two straight fiscal years as the global financial crisis takes a toll on exports and corporate activity, a Reuters poll showed.

The gloomy forecast comes after government data said on Monday the world's second-largest economy slipped into its first recession in seven years in the third quarter, meeting the widely used definition of two consecutive quarters of contraction.

Japan's economy is expected to shrink 0.5 percent in the current fiscal year to next March, followed by a 0.3 percent contraction in fiscal 2009/10, according to the median forecast of 25 economists polled from Nov 17-19.

In the previous month's survey, economists forecast growth of 0.3 percent for the current fiscal year and a 1.1 percent increase in the following year.

"Downward pressure on the economy are now at Japan's front door. The moment of truth would come in the final quarter of this year and January-March next year, when Japan will face a test of how resilient domestic demand is," said Kyohei Morita, chief economist at Barclays Capital Japan.

Economists see another three quarters of contraction in Japan's economy to come, bringing the sequential decline to five straight quarters, or the longest on record, as slowing global growth hampers the nation's export-reliant economy.

The financial turmoil has put most developed nations into recession. The euro zone is already in recession and the U.S. economy is widely expected to follow after having shrunk in the third quarter.

STEADY RATES

Median forecasts show analysts expect the Bank of Japan to keep interest rates on hold at 0.3 percent until the second quarter of 2010.

But among the 65 economists polled on rates, six expect a cut in Japan's key policy rate sometime by the end of this year -- with three of them seeing rates hitting zero. A total of 27 economists predict a rate cut sometime by the end of next year.

"As the downturn is expected to deepen in the coming quarters due to sliding exports, the BOJ may need to consider cutting interest rates further around the start of 2009," said Takeshi Minami, chief economist at Norinchukin Research Institute.

The Bank of Japan cut the overnight call rate by 20 basis points to 0.3 percent in October, its first rate reduction in over seven years, acknowledging increased downside risks to the growth and slight waning of inflationary pressure.

The monthly poll suggests Japan could teeter on the verge of deflation in the next fiscal year, starting in April 2009, after emerging from persistent price declines dating back to fiscal 2005/06.

Core consumer inflation is now seen sliding back into negative territory, at a fall of 0.5 percent, as early as the third quarter next year as demand for crude oil and other resources is quickly declining in line with the slowdown of the global economy.

Still, the median forecast for core consumer inflation in the current fiscal year was at 1.5 percent, while that for fiscal 2009/10 is for zero growth. In the October poll, the median forecast for the core inflation was at 1.8 percent for fiscal 2008/2009 and at 0.9 percent for fiscal 2009/2010.