Japan's economy falls into recession
By Lily Nonomiya (Bloomberg)
Updated: 2005-02-17 02:11

Japan's economy unexpectedly fell into recession last year for the fourth time in 13 years as consumer spending declined and exports faltered. The yen weakened.

Gross domestic product contracted at an annual 0.5 per cent pace in the quarter to December 31, the Cabinet Office said in a report in Tokyo yesterday. The median forecast of 27 economists surveyed by Bloomberg News was for 0.7 per cent growth. Revised figures showed the economy shrank for three straight quarters.

Higher taxes and falling wages may further damp consumer spending, leaving the 503 trillion yen (US$4.8 trillion) economy dependent on exports to China and the United States for growth. Finance Minister Sadakazu Tanigaki said the contraction won't change plans for spending cuts and tax increases to curb the world's largest public debt.

"What Japan's economy ultimately needs to achieve stable growth is consumer spending," said Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute, who predicted the contraction. "A premature policy change, such as raising taxes, could cause the economy to falter."

The yen weakened to 105.05 to the dollar at 5:31 pm yesterday in Tokyo from 104.41 late Tuesday in New York. Benchmark 10-year bonds rose, pushing the yield down 3.5 basis points to 1.415 per cent. A basis point is 0.01 percentage point. The Nikkei 225 Stock Average fell 0.4 per cent to 11,601.68 at the 3 pm close of trading.

The economy grew 2.6 per cent in real terms in 2004, the fastest pace since 1996, lagging the 4.4 per cent expansion in the United States and China's 9.5 per cent growth.

As with previous recoveries since Japan's bubble economy burst a decade ago, a surge in consumer spending failed to gain momentum. After growing at a 5.8 per cent pace in the first quarter, the economy shrank 0.8 per cent in the second quarter and 1.1 per cent in the third.

"The report forced some investors to acknowledge that Japan's economy is in a recession and not just a slowdown," said Satoshi Yamada, who helps oversee the equivalent of about US$4.2 billion in Tokyo at Japan Investment Trust Management Co.

Tanigaki said the technical definition of a recession two consecutive periods of quarter-on-quarter contraction does not apply to Japan's economy last year. Like the United States, Japan has a committee that marks recessions using criteria other than GDP growth alone.

"We haven't changed our assessment that the economy is still on a moderate pace of recovery," Prime Minister Junichiro Koizumi said.

A government report last week showing machinery orders rose 6 per cent in the fourth quarter revived optimism that companies would increase investment in anticipation of higher overseas sales.

"The chip industry has gone into an adjustment period and that phase will probably see bottom sometime this summer," said Terry Higashi, chairman of Tokyo Electron Ltd, the world's second-largest maker of chip-making equipment.

Export growth of 1.3 per cent was outpaced by a 3.1 per cent increase in imports in the fourth quarter. Net exports, or the difference between exports and imports, subtracted 0.2 percentage point from growth.

A worldwide glut of computer chips used to build mobile phones and personal computers has taken a toll on earnings and sales of Japanese exporters.

Hoya Corp, the world's largest supplier of glass plates used in products such as Apple Computer Inc's iPod portable music player, said profit growth slowed in the three months ended December 31 and may slump further this quarter.

Sony Corp, the world's second-largest consumer electronics maker, on January 20 slashed its operating profit forecast by 31 per cent to 110 billion yen (US$1.04 billion), citing falling prices of digital products including flat-screen televisions and DVD recorders.

Capital spending rose 0.7 per cent from the previous quarter, yesterday's report said, less than the 1.3 per cent increase forecast by economists.

(China Daily 02/17/2005 page3)

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