Bonds News

Goldman says Japan in danger of recession

TOKYO, Jan 10 (Reuters) - Japan’s tepid economy is in danger of following the United States into a recession this year, economists at Goldman Sachs said on Thursday.

Goldman’s Japan economists said in a note to clients that the probability of a recession in the world’s second-largest economy was 50 percent, forecasting slow growth in the first half of the year as emerging market economies cool.

On Wednesday, Goldman’s U.S. economists predicted a recession this year due to the housing market’s tumble and weaker consumer spending, predicting the Federal Reserve would cut overnight rates to 2.5 percent from the current 4.25 percent in response.

A recession is usually defined as an economy contracting over at least two straight quarters.

Goldman cut its forecast for growth in the Japanese economy this year to 1 percent from 1.2 percent after it said the U.S. economy will shrink in the second and third quarters.

Goldman also said it expects the Bank of Japan to keep rates on hold at 0.5 percent this year. Previously it expected a rate rise in the July-September quarter. But it believes the BOJ will resume raising rates in the second quarter of 2009.

“We expect there to be extremely little room for rate hikes justified by domestic factors,” Goldman economists Tetsufumi Yamakawa and Naoki Murakami said in the note.

Financial markets see little chance of the BOJ raising rates this year as the Fed keeps loosening monetary policy and other major central banks are cutting rates to counter a broadening global slowdown.

The biggest challenge for Japan is a recovery in consumer spending from its extended slump as falling household sentiment, stagnant wage growth and rising prices block a recovery, Goldman said.

BOJ Deputy Governor Toshiro Muto, the leading candidate to succeed Governor Toshihiko Fukui when his term expires in March, said on Thursday the economy was slowing and its positive cycle was weakening temporarily, reinforcing views the central bank will be keeping policy unchanged for a while. [ID:nT253839] (Reporting by Eric Burroughs, Editing by Michael Watson)