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GDP figures confirm Japan's recession

Japan's economy officially slipped into recession Friday with the release of September quarter GDP figures
Japan's economy officially slipped into recession Friday with the release of September quarter GDP figures  

By CNN's Geoff Hiscock and Alex Frew McMillan

TOKYO, Japan -- Japan made its recession official Friday when it released figures showing the economy shrank 0.5 percent in the September quarter from the previous quarter.

That follows a 0.8 percent drop in gross domestic product in the second quarter, thereby meeting the textbook definition of a recession - two consecutive negative quarters.

Japan's Cabinet Office said Friday the figures equated to an annualised decline of 2.2 percent.

The data confirm what economists and analysts have been saying for months -- that the world's second largest economy is in dire straits.

Merrill Lynch Japan chief economist Jesper Koll said the figures came as "no surprise" and warned there was worse to come.

"We expect six consecutive negative quarters," he told CNN television Friday.

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Koll said restructuring of the private sector and allowing companies to fall into bankruptcy was the sort of "creative destruction" that eventually would create room for profitable Japanese companies to emerge.

But he warned that the process would be long and painful, with unemployment likely to go way above 6 percent.

With the U.S. economy and Europe already struggling, Japan's latest figures add to the grim prospect of a synchronized global downturn.

For Japan, the problem is made worse by the risk that it might slip into a deflationary spiral as prices go backwards and consumers avoid spending.

Record jobless rate

At a glance: Japan

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Japan's unemployment rate hit a record 5.4 percent in October and its public debt load is a massive 140 percent of GDP.

Adding to the grim mood, data released last week showed Japanese consumer prices continued to slide for the 25th straight month.

Outside organizations such as the World Bank, the International Monetary Fund and the OECD all expect Japan's economy to contract by about 1 percent this year, and see a further contraction next year.

Even the Japanese government forecasts an overall decline for Japan this year. In early November, it forecast a 0.9 percent drop in the economy for the business year through March 2002.

The politically sensitive jobless figure released last week, followed by the GDP data Friday, highlights the challenges facing Prime Minister Junichiro Koizumi, who has pledged painful but vital reforms.

In response, Koizumi's government has passed one extra budget and is planning a second.

But the supplements are smaller than normal, and the reformist leader has also promised to rein in government spending.

Koizumi's popularity still strong

His cabinet on Tuesday approved budget guidelines for the next business year that cap new bond issuance at 30 trillion yen ($242 billion), one of his most prominent reform goals.

Despite the slumping economy, Koizumi's popularity ratings are unexpectedly high. They have flagged slightly from the record levels after he took office in April., but the latest Nikkei poll showed his approval rating stands at 78 percent.

That high level of support will be vital if he is to succeed. His critics, including some members of his own party, question whether Koizumi can push reforms at a time Japan's economy may need government support, to avoid a brutal downward spiral.

Capital spending by companies rose 0.5 percent in the third quarter, fresh figures showed on Wednesday. That was the seventh straight quarterly rise.

But economists noted that there has been a steady slowing in growth, and the figure was only a marginal gain. Most other indicators have painted a very ugly economic picture.

Along with the record unemployment rate, incomes are shrinking and business confidence is down. Bankruptcies are rising.

Faced with that darkening economic cloud and persistent problems at Japan's banks, the three main credit rating agencies recently dropped Japan's creditworthiness. Japan is now in a tie with Italy, as the least-likely major industrial nation to pay back its debts.

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Rating agency Fitch predicts Japan's public debt load could rise from 140 percent of GDP now to as high as 200 percent by 2007 at the current rate.

Japan's slump is doing nothing to help the rest of the region. It is the largest Asian trading partner for most Asian countries.

Some economists believe that Japan's GDP figures are too dated and erratic to give a true picture of its business and industry. Many opt to look at other indicators such as the "diffusion" index, to see if it is in recession.

Richard Jerram, Japan economist for ING Barings, dates the start of Japan's recession to January.

Ron Bevacqua, Tokyo-based chief economist for Commerz Securities, told CNN last week that Japan may be on the verge of a deflationary spiral.

He said the jobless figure was putting more downward pressure on the economy at the same time as deflation intensified.

Warning that the economic situation would "get worse before it gets better", Bevacqua said Koizumi had been an "enormous disappointment" in his handling of the situation.


• Japan Cabinet Office

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