Japan nears fifth recession in 15 years

Harakiri in slow motion

By Ben McLannahan in Tokyo

The Japanese economy has shrunk at its fastest pace since the earthquake-hit first quarter of 2011, piling pressure on the government to try to avert recession.

Yoshihiko Noda, prime minister, described the 3.5 per cent annualised decline in the July-September period as “severe”. Seiji Maehara, economy minister, said Japan had possibly entered a “recessionary phase”.

Many of Japan’s economic indicators have deteriorated since September, leading economists to predict that the nation has entered its fifth technical recession – two consecutive quarters of contraction – of the past 15 years.

“The question is how long and deep this downturn will be and how policy makers will react,” said Masamichi Adachi, an economist at JPMorgan.

The economy posted relatively strong growth in the first half of the year, as output was boosted by reconstruction in areas of northeastern Japan devastated by the March 2011 earthquake and tsunami. But it took a turn for the worse in the third quarter, as demand ebbed in China while Europe remained sluggish.

In July-September, Japanese exports fell 5 per cent, while household consumption and business investment also slipped. Excluding early 2011, the data released on Monday marked Japan’s biggest quarterly contraction since the fourth quarter of 2008 during the Lehman crisis.

Japan’s post-Lehman growth has been among the world’s most patchy. The economy was one of the best-performing among developed nations in 2010, as it snapped back from a 5.5 per cent fall in real GDP in 2009 to record growth almost double the G10 average of 2.6 per cent. Last year, though, output was knocked by 0.8 per cent as the nation struggled to overcome the various effects of the earthquake and tsunami and severe flooding of production facilities in Thailand.

The economy is expected to suffer again in the fourth quarter of this year, as the country remains locked in a territorial dispute with China, its largest trading partner over contested islands in the East China Sea. The spat over the Senkaku islands – which China calls the Diaoyu – has sparked unofficial boycotts of Japanese goods.

Japanese manufacturers from carmaker Nissan to Shiseido, the cosmetics company, have reported steep falls in Chinese sales, following a wave of demonstrations in September against Tokyo’s nationalisation of some of the islands. Japan’s seasonally adjusted trade balance in September, registered a deficit of Y980bn ($12.3bn), the biggest since comparable records began in 1993.

In recent months, the Bank of Japan has come under political pressure to take steps to tackle the economy. It carried out rare back-to-back expansions of its monetary-easing programme in September and October to counter “weakening” domestic demand, caused by slowing exports and industrial production.

Many analysts expect more easing to come. In a speech on Monday, Masaaki Shirakawa, Bank of Japan governor, said the bank should “exert every effort to enhance its easing effects as much as possible”. He added that domestic demand was “unlikely to increase at a pace that will outperform the weakness in exports”.

The Japanese government’s monthly survey of “economy watchers”, which includes barbers, hoteliers, car dealers and others who deal with consumers, has recorded six falls in a row since April. Last month the index stood at a level little better than that of April 2011, in the immediate aftermath of the quake.

The government last month approved a modest stimulus package to boost the economy. But it has struggled to carry out more aggressive measures because of a stalemate with opposition parties over passage of a bill that would allow it to issue bonds to finance its huge deficit. That stand-off has raised concerns that Japan might face a fiscal cliff if it is forced to cancel scheduled bond auctions.