Japan Economy Shrinks 2.4%, Signaling Recession Looms (Update1)

By Jason Clenfield


Aug. 13 (Bloomberg) -- Japan's economy contracted last quarter, bringing the country to the brink of its first recession in six years, as exports fell and consumers spent less.

Gross domestic product shrank an annualized 2.4 percent in the three months ended June 30 after expanding a revised 3.2 percent in the first quarter, the Cabinet Office said today in Tokyo. The median estimate of 29 economists surveyed by Bloomberg News was for a 2.3 percent contraction.

The drop in exports was the biggest since the 2001 recession, and robs Japan of the engine that drove its longest postwar expansion just as surging food and fuel prices deter spending at home. Toyota Motor Corp. last week reported its worst earnings decline in five years as U.S. sales slumped, and Japan Airlines Corp. said it will cut wages to meet rising costs.

``The bottom line is that the economy is in a clear downturn,'' said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo.

The yen traded at 109.14 per dollar as of 9:20 a.m. in Tokyo from 109.33 before the report was published. The Nikkei 225 Stock Average fell 1.3 percent.

The economy shrank 0.6 percent from the first quarter, when it grew 0.8 percent. The quarterly decline matched economists' predictions.

Exports Fall

Exports dropped 2.3 percent, the first decline in three years. Imports fell 2.8 percent.

Consumer spending, which accounts for more than half of the economy, decreased 0.5 percent from the previous quarter, compared with expectations of a 0.6 percent decline. The decline may have been exaggerated by comparison with the first quarter, when the leap year gave consumers an extra shopping day.

Domestic demand, which includes company and consumer spending, accounted for 0.4 percentage point of the economy's quarter-on-quarter contraction. Capital spending slipped 0.2 percent, compared with expectations of a 0.6 percent drop.

The world's second-largest economy has yet to contract for two consecutive quarters, one definition of a recession. Still, the prices companies pay for raw materials are rising at the fastest pace in 27 years and demand has weakened in the U.S., the country's biggest export market. That's eroded profits, forcing businesses to cut production, investment and hiring.

Toyota Fires Workers

Toyota, Japan's biggest company, last week lowered its vehicle sales forecast by 3.5 percent for the year ending March 2009. Since June, Toyota has fired 800 workers at a Kyushu-based subsidiary that's making fewer sport-utility vehicles and Lexus sedans bound for the U.S.

Prime Minister Yasuo Fukuda, whose popularity has plummeted since he took office last September, said this week that the economic situation is ``severe'' and he plans to announce relief measures later this month end to help companies and households cope with record energy costs.

Japan Air, the country's largest carrier by sales, said last week that it will reduce workers' pay by 5 percent to compensate for the increase in fuel prices.

Consumer sentiment fell in July to the lowest level since records began 26 years ago, after inflation outpaced wage growth. Summer bonuses at Japan's biggest companies dropped for the first time since 2002, according to the Keidanren business lobby.

The government last week described the economy as ``weakening,'' language it hadn't used since the most recent recession in 2001. Stalling growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep its benchmark interest rate at 0.5 percent for the rest of the year, according to economists surveyed last month.

Not as Severe

Still, the current slowdown is unlikely to be as severe as past recessions because companies have paid off debt and shed extra workers and idle equipment, said Huw McKay.

``We're not in the kind of situation we were in at the end of previous expansions,'' said McKay, senior international economist at Westpac Banking Corp. in Sydney. ``There's going to be a floor under this economy.''

Companies plan to increase capital investment by 4.1 percent in the year ending March 31, according to a survey released last week by the Development Bank of Japan. While that's slower than last fiscal year's 7.7 percent, it's better than the 10 percent decline recorded during the 2001 recession.

The Bank of Japan's most recent business survey showed that labor demand is close to a 16-year high. The jobs-to-applicants ratio was at 0.91 in June, meaning almost every person who wants a job can get one. Seven years ago, there were two applicants competing for every position.

``The economy is decelerating,'' said Westpac's McKay. ``But it doesn't look an economy that's collapsing and that's the key point.''