Japan enters first recession in 7 years

November 17, 2008

, TOKYO, November 17 – Japan has slipped into recession for the first time in seven years as the global financial crisis mauls its export-dependent economy, official data showed on Monday.

Japan joins Germany and Italy on the list of major economies that are now officially in recession, despite emergency steps by world powers to try to stem months of turmoil on financial markets.

"This is not going to be a short or painless recession," warned Noriko Hama, a professor and economist at Doshisha University.

"When financial crises of this magnitude occur, as a rule of thumb we generally have a 10-year recession. We had that in the 1990s in Japan," she said.

Japan\’s economy, the second largest in the world, unexpectedly contracted 0.1 percent in the third quarter, 0.4 percent on an annualised basis, after shrinking 0.9 percent in the second, the Cabinet Office said.

The data "showed that the economy is in a recession phase. There is a risk it may worsen further," said Economic and Fiscal Policy Minister Kaoru Yosano.

The last time Japan fell into recession, which is usually defined as two or more consecutive quarters of economic contraction was in 2001 after the Internet bubble burst.

The latest recession began even before the Tokyo Nikkei stock index sank to a 26-year low in October, dealing a heavy blow to consumer and business confidence.

Business investment slumped 1.7 percent in the third quarter while exports were worse than expected, as the financial crisis triggered by a US housing slump squeezed other major economies.

"Japan was dragged down by the weakness in the global economy," said Kyohei Morita, chief Japan economist at Barclays Capital, who expects the recession to last for four quarters.

Although Japan has not suffered financial turmoil on the same scale as the United States or Europe, its trade-dependent economy remains highly vulnerable to global downturns.

"Japan is as export-driven as ever. So as long as exports are slowing due to the weakness of the global economy, we cannot escape," said Morita.

After suffering a series of on-off recessions in the 1990s, Japan had been slowly recovering on the back of brisk exports and business investment.

Corporate profits, however, are now sliding as exports suffer from the global slowdown and a stronger yen, prompting companies to slash investment in new equipment and factories, which had been a key driver of economic growth.

"Companies have repeatedly frozen or shelved capital expenditure plans given negative feedback from the overseas financial markets," noted Morgan Stanley economist Takehiro Sato.

He expects Japan\’s economy to shrink 1.1 percent in 2009 and believes interest rates will be cut back to zero next year as the recession drags on.

Consumer spending rose 0.3 percent in the third quarter helped by a hot summer and demand for televisions ahead of the Beijing Olympics.

But analysts said Japanese consumers are likely to tighten the purse strings as the economy worsens and companies shed workers. With energy costs now dropping, some analysts even expect a return to deflation.

"We are already seeing the start of a vicious cycle in which a worsening labour market leads to slack consumption," said Naoki Murakami, chief economist at the Monex brokerage firm.

Japan\’s government is trying to cushion the impact of the economic slump by pushing through a fiscal stimulus package worth about 277 billion dollars, but analysts said the spending boost was likely to have a marginal effect on growth.

"Even if we all go out and party, that will be one big shot and that\’s all," said Professor Hama.

On the other hand, "people might hold on to the cash for a rainy day or to pay back debt," she said.

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