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Japanese economy shrinks, adding to recession fears
August 13, 2008 / 1:03 AM / in 9 years

Japanese economy shrinks, adding to recession fears

TOKYO (Reuters) - Japan’s economy contracted in the second quarter at its sharpest rate in seven years, adding to worries that the world’s No.2 economy has slipped into a recession as global growth shows more signs of losing steam.

Consumers and companies cut spending as they struggle with steep energy and raw material costs, while spreading damage from the U.S. slowdown hurt exports to emerging nations -- possibly marking the end of Japan’s longest expansion since World War Two.

The 0.6 percent contraction matched the consensus forecast of economists and was the biggest quarterly decline since July-September 2001, when Japan was last in recession after the Internet stock bubble burst.

“The data gave the impression that the economy has entered a recession, and I think it is in one,” said Takahide Kiuchi, chief economist at Nomura Securities.

Economists are divided on whether the economy will shrink further in the current quarter -- thereby matching a widely used definition of a recession -- but they agree that any return to growth will be soft and will depend heavily on the direction of oil prices and how quickly the world economy picks up.

“There is still some possibility that GDP will return to positive territory in the July-September quarter, but the downturn trend is likely to continue,” said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.

Many economists say the Japanese economy is in much better shape than when it went through slumps in 1998 or 2001, with companies having cleaned up their balance sheets after the collapse of an asset bubble in the 1990s.

Yields on 10-year Japanese government bonds fell to a four-month low as the data confirmed expectations that the Bank of Japan will keep interest rates on hold for several months but is unlikely to cut them from the already low 0.5 percent.

Tokyo stock market's Nikkei average .N225 shed 2.1 percent, with shares of exporters leading the drop after the figures reinforced concerns about the economic outlook at home and abroad.

Many economists and government officials say Japan is either falling into a recession or is already in one, ending a growth cycle that began in early 2002, the longest in six decades. Japanese officials measure a recession as a broad downturn.

The annualized contraction of 2.4 percent in Japan compared with 1.9 percent annual growth in the same quarter in the United States, where tax rebates gave the economy a shot in the arm.

NO RATE MOVE FOR A WHILE

Economics Minister Kaoru Yosano said the economy was weakening, hurt mainly by external factors such as high oil prices, but said it would not keep falling.

“Even though the economy contracted in April-June, it would be more accurate to think that it won’t last long.”

Caught between gloom and rising grocery prices in an economy where deflation was common for most of the past decade, the Bank of Japan has kept rates steady and has struck an increasingly cautious tone on the outlook.

“We can’t expect export growth to accelerate anytime soon, so the economy will remain in an adjustment phase for the rest of this year,” said Takumi Tsunoda, a senior economist at Shinkin Central Bank Research.

“But we can probably avoid a full-fledged recession, as in several straight quarters of GDP contraction. We still expect the Bank of Japan’s next policy move to be a rate hike, but it won’t come for the rest of this year.”

Private consumption, which accounts for some 55 percent of Japan’s economy, fell 0.5 percent in the second quarter, after recent rises in food and gasoline prices hurt consumer sentiment and weak wages prompted shoppers to limit spending. That was the first drop in almost two years.

“Though prices are soaring, our salaries don’t rise. Our nation as a whole is demoralized,” said 58-year-old part-time worker Misako Shibasaki.

Another culprit in the downturn is weakening exports. Shipments to the United States have already faltered, and now those to emerging Asia have begun to sputter after maintaining growth through the first year of the global credit crisis.

Corporate capital spending, another driver of Japan’s growth in recent years, fell 0.2 percent for a second straight quarter of decline.

Additional reporting by Tetsushi Kajimoto and Hideyuki Sano; Editing by Rodney Joyce and Michael Watson

Our Standards:The Thomson Reuters Trust Principles.
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