Vicious cycle may have gripped Japan

By staff and wire reports

TOKYO, Japan -- Finance Minister Masajuro Shiokawa admitted Friday that Japan's business and industry are in trouble.

New gross domestic product figures confirmed the world's second largest economy is in recession. But Shiokawa said they were better than he had expected.

"The figures show economic conditions are bad, and that's a serious issue," Shiokawa said. "But it's better than April-June and better than I expected."

Friday's numbers showed Japan's national output shrank 0.5 percent in the third quarter, after declining 0.8 percent the quarter before.

That was slightly worse than the 0.4 percent quarter-on-quarter drop that economists had expected.

Shiokawa not talking bond buying

Shiokawa said he would discuss the overall economic picture in the United States and Japan later Friday, in his scheduled meeting with U.S. Deputy Treasury Secretary Kenneth Dam.


Shiokawa said he would not be discussing Japan buying foreign bonds with the U.S. Deputy Treasury Secretary Kenneth Dan

But the finance minister said he would not be discussing Japan buying foreign bonds. That controversial step was mooted by the Organization for Economic Cooperation and Development in its annual report on Japan, out this week.

Buying foreign bonds, most likely U.S. Treasuries, would weaken the yen, making Japanese goods cheaper overseas. A rebound in exports normally leads any Japan turnaround.

Even Japan's exporters have been flagging recently. But the real drag in the third quarter came from private demand.

Consumption fell 6.6 percent over the previous quarter, much worse than household-spending figures had hinted.

Wages were also a big source of weakness, with employee pay down 6.5 percent quarter over quarter.

Vicious cycle may already be here

Domestically, unemployment is at a record high, and prices and incomes are dropping.

Though some experts joke that Japan -- now in its fourth recession in 10 years -- is permanently in trouble, they also warn that this decline is worse than normal. Japan may need to act to prevent itself from getting caught in a downward economic spiral.

The big drop in consumer spending for the third quarter suggests that a vicious cycle may already be at hand, investment bank J.P. Morgan said in a report.

The bank questioned how long Japan's government can sit on the sidelines. Prime Minister Junichiro Koizumi is clinging to his pledge to restrict government bond issuance to 30 trillion yen.

Though Japan's public spending has led to a huge public debt burden, experts say now may not be the time to turn off the spigot.

Two down quarters in a row meet the most widely accepted definition of a recession. But economists like ING Baring's Richard Jerram say Japan has in fact been recessionary since the start of the year.

Hiranuma: Another drop 'inevitable' next year

Bankruptcies and corporate failures are on the rise. The midsize construction firm Aoki was the latest in a steady stream of companies to collapse when it sought protection from its creditors on Thursday.

The market saw the recession coming. Tokyo's benchmark Nikkei index was trading basically flat, down 0.01 percent at 10,855.77, in early afternoon trade.

Most of the components that go into the GDP figures had already been released.

The government expects Japan's economy to shrink 0.9 percent in this business year.

Trade Minister Takeo Hiranuma warned Friday that Japan risks going backwards next business year, too.

"If the current situation continues, negative growth is inevitable," he said.

Reuters contributed to this report.