Tokyo: Japan’s economy shrank in the last quarter by its most since the first oil crisis in 1974, hit by an unprecedented slump in exports, which is likely to lead to more calls for extra stimulus.
Japan has not suffered much directly from the bursting of bubbles in US credit and housing markets, but its heavy dependence on exports and persistently soft domestic consumption has led to a sharper contraction than other major economies.
As the rich world faces its worst downturn in decades, the Group of Seven (G7) policymakers pledged at the weekend to do all they could to combat recession.
Japan’s economy shrank 3.3%, or an annualised 12.7% in the fourth quarter of 2008 - three times the fall in gross domestic product in the same quarter in the United States, at the epicentre of the current global crisis.
With exporters cutting production and laying off staff and many retailers reporting sharp falls in sales, economists saw little hope of a bounce back for Japan.
“The data showed a severe picture of the Japanese economy and highlighted the weakness in exports,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
Spooked by sliding US Treasuries and reports that the heavily indebted Japanese government may be planning further big stimulus spending, March 10-year government bond futures fell a third of a point.
“There’s no question that this is the worst recession in the post-war period,” economics minister Kaoru Yosano told a news conference.
The government had to pursue all options to keep the economy afloat, he said, but he struck a cautious note on large scale spending, saying it could not get “addicted to pain killers”.
The Nikkei share average fell 0.2% but the yen rose slightly, after the G7 omitted any reference to the currency’s strength in its final communique. The yen’s 24% against Japan’s key trading partners in the quarter has added to the pain for big exporters such as Toyota and Panasonic.
The big slide in Japanese GDP in the October-December quarter was its second-worst in modern times, lagging only a 3.4 percent contraction in 1974, after the first Middle East oil shock.
The contraction was bigger than economists’ median forecast of a 3.1% fall and also worse than the downturn ensnaring all other major economic powers in the same quarter.
The eurozone GDP shrank 1.5% its deepest contraction on record, while the United States economy shrank just under 1 percent in the quarter (an annual rate of 3.8%).
A plunge in exports was the main culprit behind the massive Japanese contraction, slashing GDP by 3.0 percentage points in the quarter.
The subsequent build-up in inventories of unsold cars, flat-screen TVs and many other goods has forced Japanese manufacturers to halt factory lines, pushing industrial production off a cliff.
“Given a rise in inventory and a decline in final demand, output adjustments will continue in January-March, paving the way for another big contraction in the first quarter,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Securities.
“As the US stimulus package will have its effect on Japanese exports, Japan’s economy may start picking up from April-June onwards, but it will be a very weak recovery amid a lingering recession. The economy can’t avoid a second straight year of contraction in the fiscal year starting in April.”
The sharp deterioration has prompted big exporters to cut jobs and threatened their small suppliers, sending company bankruptcies sky-rocketing and raising worries that the country’s already fragile consumption could sputter even more.
The government, deeply unpopular with voters and facing an election this year, has so far set out two stimulus packages, and Japanese media said ruling parties were eying a third one that could include up to ¥30 trillion ($327 billion) in fiscal spending.
However, with parts of the previous packages stuck in Japan’s deeply fractious parliament and with Prime Minister Taro Aso’s popularity in deep decline, doubts are growing over how long he can survive.
The economy minister also said he was wary about the push from the main ruling party, the Liberal Democrats, to spend more. “The party may have a plan for additional spending worth 30 trillion yen... but we can’t think of good ways to spend that much”, Yosano said.
Wary of mounting problems for Japan’s economy, the BoJ has nudged interest rates down near zero, taken some unconventional steps including buying of commercial paper, and set up a new funding scheme using corporate debt as collateral.