Thursday, February 17, 2005
Japan slips into recession again
FT Reporters / London February 17, 2005
Japan's economy slipped into recession for the fourth time in 10 years, as data released on Wednesday showed gross domestic product contracted 0.1 per cent in the fourth quarter.
GDP in real, or price-adjusted terms, for the quarter ended December 31 dropped from the July-September quarter on weak consumer spending and a surge in imports. On an annualised basis, GDP declined 0.5 per cent.
Japan also officially revised down data for the July-September quarter to a contraction of 0.3 per cent, reversing a previously stated 0.1 per cent increase, and revised GDP growth in the April-June quarter to a 0.2 per cent drop.
The government had flagged in November it would revise the data after it said it would recalculate GDP using a new methodology in line with international standards.
Wednesday's simultaneous release of lower fourth-quarter GDP data and the downward revisions for previous quarters mean Japan's economy is technically in a recession, defined as two consecutive quarters of contraction.
Though economists were mixed on whether such small contractions meant the pace of recovery in the world's second largest economy had lost all momentum, the data appeared likely to at least remove some of the gloss of any positive factors such as corporate profitability and structural reforms. The data also highlight that Japan's emergence from the legacy of its bubble economy, namely debt, fragile consumer sentiment, anaemic growth and chronic deflation is fraught with risk. Japan had been widely praised last year by investors and economists for a recovery seen as the strongest since the country's property bubble burst in the 1990s.
However, last November Japan revealed that part of its recovery was a statistical illusion after the cabinet office recalculated GDP to better account for deflation. At the time it issued provisional estimates showing GDP in the April-June and July-September quarters had contracted instead of grown and said large revisions were likely.
The new methodology for calculating GDP ultimately spurred the Bank of Japan to cut its growth estimates for this year and next by 1 percentage point. Its new estimates are for growth of about 2.5 per cent for the year to this March and about 1.5 per cent for the year to March 2006
Some economists remain optimistic, citing that structural changes in Japan have clearly taken place. Banks have worked through bad debts and companies have paid back the bulk of their loans, cutting bloated corporate credit to pre-bubble levels.
Industrial Japan has also pared its costs, particularly its wage bill, and improved supply-chain management and strategic use of cheaper foreign labour.
As a result, better external conditions have fed rapidly through to higher profitability.
Wednesday's data also may remove some of the urgency behind a campaign to increase Japan's sales tax.
In January Sadakazu Tanigaki, Japan's finance minister, told the Diet's lower house budget committee that a rise in consumption tax, now 5 per cent, was needed to tackle the government's ballooning budget deficit.
However the Ministry of Finance is under tremendous pressure from politicians to avoid the subject of a sales tax rise for fear of damaging consumer confidence at a time when wages are continuing to fall.
The last time the tax was increased, in 1997, the measure was blamed for pushing the economy into recession.