Japan may be in recession, figures suggest

CBC.ca

Japan’s economy contracted in the latest quarter, signalling that like Europe it may already be in recession, further weighing down world growth.

On an annualized basis, the world’s No. 3 economy shrank 3.5 per cent in the July-September quarter, in line with gloomy forecasts after Japan’s territorial dispute with China hammered exports that were already weakened by feeble global demand.

The bad news will temper optimism over recoveries in China and the United States., where some economists are predicting growth will top three per cent in the third quarter. China’s painful slowdown likely bottomed out in the third quarter, with recent indicators such as factory production and auto and retail sales showing improvement.

Japan’s outlook remains bleak, with most economists forecasting a further decline in economic activity for the October-December quarter, which would officially put it in a recession according to the common definition of two consecutive quarters of contraction.

Consumer spending fell 0.5 per cent in the third quarter, as subsidies for auto purchases expired, and corporate capital spending fell 3.2 per cent. Spending on reconstruction from the country’s March 2011 disasters has also weakened.

The drop for the current October-December quarter may not be as severe as that experienced in July-September.

“If the economy does recover in any way it will be a minute rebound,” said David Rea, an economist in London with Capital Economics. He said the contraction in gross domestic product in the last quarter of 2012 could be a couple of percentage points.

Deflationary funk

More than two decades after Japan’s asset bubble burst in the early 1990s, its policymakers have yet to devise an effective strategy to help the economy break out of its deflationary funk. At the same time, the Japanese yen remains stubbornly high, discouraging its companies sitting on piles of cash from investing at home and undermining its export competitiveness, especially against rivals Germany and South Korea.

Strangled by weak consumer spending and public investment, the economy grew at an anemic 0.7 per cent annual pace in April-June, according to figures that were revised down by half from the originally reported 1.4 per cent.

Until recently, the government was still forecasting growth at about 2 per cent for the year. It had predicted a turnaround late in the year, but the renewed tensions with China over disputed islands in the East China Sea, coupled with sluggish growth in Europe and other key export markets, have doused hopes for a significant rebound before 2013.

A slew of dismal recent data releases offers little encouragement.

Squeezed by surging costs for imported fuel and sinking exports, Japan’s current account surplus plunged to 2.72 trillion yen ($34 billion US) in April-September, its lowest level since monthly data began in 1985, as the trade deficit surged.

Stark reminder

Although Japan will likely continue to run current account surpluses for some time to come, its decline is a stark reminder of the country’s persisting reliance on exports to support its energy-intensive standard of living through massive imports of food, fuel and other resources.

Machinery orders for September fell twice as fast as expected. Meanwhile, the job market softened, likely hurting prospects for stronger consumer spending to help offset weak exports. Slower-than-anticipated government spending on reconstruction has further undermined demand.

Japan’s local governments are running short of funds as lawmakers dicker over legislation needed to authorize bonds to pay for deficit financing.

Signs of a recovery in China’s growth rate offer the tantalizing hope of stronger demand for Japan’s exports — if only territorial tensions are kept in check.

Tokyo’s first policy priority should be to defuse the antagonisms with Beijing that sparked sometimes violent protests in September, and are fuelling a backlash against Japan and Japanese products, especially cars, Baader said.

The Japanese yen has remained excruciatingly strong due to the country’s status as a safe haven for investment. Rather than a gradual depreciation that might erode investor confidence, Baader says, what is needed is a sudden intervention that would take the yen to between 85 yen-95 yen per dollar, or perhaps even higher, from its current 79 yen to 80 yen per dollar.

In the longer run, wider reaching, more painful reforms will be required to regain sustainable growth, said Rea of Capital Economics.

Piles of cash

Despite their generally meagre, often declining profitability, Japan’s megabanks, trading houses and other big corporations are sitting on huge cash piles. Instead of investing at home and hiring Japanese workers, they are using those resources to snap up assets around the world, such as Softbank’s recent acquisition of Nextel.

More crucially for world finances, Japan must finally grapple with its national debt, now at an unsustainable level of some 235 per cent of the country’s GDP. Dealing with that problem requires spending cuts and even bigger tax hikes than a planned increase in the national sales tax to 10 per cent that is due to take effect in 2014.

For now, Japan’s economy is cushioned by massive investments in its own debt, which protect it from any sudden major shifts by foreign investors, and by its massive earnings on foreign investments by its own financial institutions and corporations.

Despite more than two decades of stagnation, so far there has been little progress toward such reforms. Frequent changes in leadership — six prime ministers in just six years — have further undermined momentum for change.

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