November 17, 2008 / 12:39 AM / 10 years ago

UPDATE 4-Crisis sends Japan into recession, outlook bleak

(For more stories on the financial crisis click [ID:nCRISIS]) (Adds quote, election details)

By Leika Kihara

TOKYO, Nov 17 (Reuters) - Japan slid into its first recession in seven years in the third quarter as the financial crisis curbed demand for Japanese exports, with some analysts warning the country may be headed into its longest recession on record.

The 0.1 percent contraction in July-September GDP confirmed the global financial crisis has sabotaged growth in yet another major economy. The euro zone is also in recession, using the common definition of two consecutive quarters of contraction, and the United States is seen following. [ID:nLE536930]

Some economists warned Japan could face a record four quarters in a row of recession, and Economy Minister Kaoru Yosano similarly warned of increasingly tough times ahead.

“The downtrend in the economy will continue for the time being as global growth slows,” Yosano told a news conference.

“We need to bear in mind that economic conditions could worsen further as the U.S. and European financial crisis deepens, worries of economic downturn heighten and stock and foreign exchange markets make big swings.”

The European and Japanese recessions underscore the task facing world leaders who backed on Saturday a plan to combat the global economic crisis, but failed to impress markets seeking specific measures. [ID:nG7G8]

Market mayhem since October, not included yet in the published gross domestic product (GDP) figures, adds to the gloomy outlook for Japan, the world’s second-largest economy.

Tokyo's Nikkei share average .N225 has fallen by a quarter since the start of October, and the yen JPY= spiked to a 13-year high against the dollar last month, further hurting exporters and surely curbing consumption.

Bank of Japan Deputy Governor Kiyohiko Nishimura warned that the market mayhem was not over.

“Due to strong awareness of counterparty risks in the dollar markets, the function of these markets is declining and Japan’s financial market is also becoming unstable,” Nishimura said at a seminar on Japanese and French financial markets.

Japan’s gross domestic product figure translated into an annualised fall of 0.4 percent, lagging a consensus market forecast for a 0.3 percent expansion, government data showed.

A YEAR OF PAIN?

Japan’s second-quarter contraction was revised in Monday’s data to a larger 0.9 percent slide, the biggest such drop in seven years, and some said GDP could slide for a full year.

“The risk of Japan posting a third or fourth straight quarterly contraction is growing, given the fact that we can no longer rely on exports as overseas economies are slowing down due to the spread of the financial crisis,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

For a graphic of the quarterly GDP change, click:

here

The yen dipped after the data, but a global flight to low-risk currencies meant the fall was shortlived. Japan’s Nikkei share average fell 2.5 percent before bargain hunters turned the index around. [.T] [FRX/] FXNEWS

In a sign the global economic slowdown was dealing a blow to Japanese companies, capital expenditure fell 1.7 percent in July-September. External demand shaved 0.2 point off GDP as growth of imports exceeded that of exports.

Japan had enjoyed its longest period of economic expansion since World War Two until last year, largely on the back of corporate expansion and exports, when the subprime crisis hit.

Taro Saito, a senior economist at NLI Research, could offer no encouraging outlook for Japan’s big corporates or the consumer spending that makes up the bulk of the economy.

“Japan will probably post a continuous and more notable contraction as a slowdown in global economies is expected to affect exports and the appetite for capital spending, which will then hurt consumer spending,” Saito said.

On Friday, the 15-nation euro zone reported its economy shrank 0.2 percent for the second quarter in a row, and most economists say the United States is probably in recession, although official data won’t come until January. [ID:nLE536930]

The Bank of Japan, which had opted out of coordinated interest rate cuts, joined the global trend late last month by cutting its key interest rate target to 0.30 from 0.50 percent.

Economists are divided over whether the central bank may cut rates even further, with some forecasting a return to Japan’s policy of zero rates while others see no point in such a move.

“It’s too late for monetary policy to revamp the economy. The economy needs to depend on fiscal policy,” said Kyohei Morita, chief economist at Barclays Capital Japan.

As well as planned government stimulus spending, the export outlook will play a big part in a return to growth for Japan, but analysts were disappointed with the efforts of world leaders at a G20 meeting on the crisis over the weekend.

The lengthening crisis looks set to delay Prime Minister Taro Aso’s election plans.

It had been thought that Aso would call a snap election this year but he has since vowed to focus on tackling the crisis, prompting media speculation it may be well into next year before voters go to the polls. (Additional reporting by Tetsushi Kajimoto, Yuzo Saeki, Yasuhiko Seki; Writing by Rodney Joyce; Editing by Hugh Lawson)

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