Japan's Economy Likely Peaked as Exports Resisted U.S. Slowdown

By Jason Clenfield


Feb. 6 (Bloomberg) -- Japan's economic growth probably peaked last quarter as exports resisted a slowdown in the U.S. that's likely to cool the global expansion this year.

The world's second-largest economy grew an annualized 1.6 percent in the three months ended Dec. 31, compared with 1.5 percent in the third quarter, according to the median estimate of 27 economists surveyed by Bloomberg News. The report is due Feb. 14 at 8:50 a.m. in Tokyo.

Japanese manufacturers plan to cut production, reflecting expectations that demand for flat-panel TVs and autos will decline as the global economy loses steam. The Nikkei 225 Stock Average has dropped 10 percent this year and consumer sentiment is at a four-year low, indicating that domestic demand may falter in the months ahead.

``The curtain is coming down on the economic recovery that began in early 2002,'' said Naoki Murakami, an economist at Goldman Sachs Group Inc. in Tokyo. ``Production trended up until October but is turning down due to the export slowdown.''

The risk of slower growth has probably taken an interest- rate increase by the Bank of Japan off the table. Rather than pushing ahead with its policy of gradually raising rates, the central bank's next move may be a cut, some investors predict. Calculations by JPMorgan Chase & Co. using overnight interest- rate swaps show a 25 percent chance of a reduction in the benchmark rate from 0.5 percent by July.

Export Growth

The GDP report is expected to show that net exports -- the difference between exports and imports -- accounted for most of Japan's growth for the second consecutive quarter. Shipments abroad probably climbed 2.9 percent as the expansion in emerging markets helped fuel demand for Japanese products.

Toyota Motor Corp. said yesterday sales increased 9.2 percent in the three months to Dec. 31 as demand from Russia and China countered stagnant purchases at home and a drop in the U.S.

Waning demand in Japan's biggest export market is already hurting some manufacturers. Honda Motor Co. said last week that U.S. motorcycles sales fell during the Christmas season.

``There was a big impact in places where housing prices are falling,'' Honda's Executive Vice President Koichi Kondo said.

Shipments to emerging markets, which propped up exports in the last four months of 2007 when sales to the U.S. fell, are also waning. Exports to China grew at the slowest pace in almost two years in December.

Slower Production

Production may slow as world demand ebbs in line with the U.S. economy, which Goldman Sachs, Morgan Stanley and Merrill Lynch & Co. forecast will slip into a recession this year.

Manufacturers plan to cut production in January and February, the first back-to-back declines since 2005, the Trade Ministry said last week. Japan has had three recessions since 1991, each coinciding with output slumps.

``The production forecasts tend to be pretty optimistic so the reality could be even worse,'' said Takehiro Sato, chief economist at Morgan Stanley in Tokyo. ``If industrial production starts to drop that means that both external demand and domestic demand will drop simultaneously.''

Domestic demand probably added only 0.1 percentage point to growth last quarter as the economy continued to suffer the consequences of a drop in construction. Housing starts plunged in the six months since June because of a permit logjam caused by government regulations designed to stop building fraud.

Residential investment fell 9.3 percent from the previous quarter, according to the economists surveyed, after falling 7.3 percent in the third quarter. The latest figures show that the drop in housing starts is slowing and the industry is making up lost ground.

Housing Recovery

``A sustained recovery in the construction sector could add half a percentage point or more to GDP growth in 2008,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Although consumer spending in the fourth quarter probably maintained its 0.3 percent growth pace from the previous three months, the outlook is worsening.

Household sentiment dropped to a four-year low in December as food and gasoline prices rose and wages fell. Hiring, which has been supporting consumer spending in the absence of pay growth, is now showing signs of slowing. Applicants outnumbered job offers for the second straight month in December.

``The outlook for the first quarter and beyond has grown increasingly fragile,'' said Hiromichi Shirakawa, chief economist at Credit Suisse Group Inc. in Tokyo. ``The true test lies ahead, with a sharp slowdown in personal consumption particularly likely over the next few quarters.''