Japan's Economy Shrinks 0.4%

Japan's economy, the world's second largest, unexpectedly shrank in the third quarter, entering the first recession since 2001 as companies cut spending.
TradingEconomics.com, Bloomberg.com 11/17/2008 5:11:21 AM

Gross domestic product fell an annualized 0.4 percent in the three months ended Sept. 30, the Cabinet Office said today in Tokyo. Economists predicted the economy would grow 0.1 percent after contracting a revised 3.7 percent in the previous period.

The slowdown may deepen as the global financial crisis hurts exports, prompting companies from Toyota Motor Corp. to Canon Inc. to slash profit forecasts and cut investments. Japan has the lowest interest rates among the 20 biggest economies and public debt that exceeds 180 percent of GDP, limiting the government's ability to stimulate growth.

The yen fell to 97.49 per dollar as of 12:57 p.m. in Tokyo from 96.09 before the report. Japan's currency has gained 8.9 percent since the end of September, compounding exporters' woes.

The Nikkei 225 Stock Average rose 2.7 percent, reversing declines of as much as 2.9 percent, as investors bought shares of drug and utilities companies, whose earnings are less vulnerable to a slowdown. The gauge has lost 43 percent this year. The yield on Japan's 10-year bond was unchanged at 1.5 percent.

The economy last contracted over two consecutive quarters -- the technical definition of a recession -- in 2001. Europe also entered a recession last quarter, a report showed last week.

Leaders from the Group of 20 nations this weekend agreed to take a ``broader policy response'' by using interest-rate cuts and fiscal stimulus to shore up the weakening global economy. The Bank of Japan has little scope to contribute further after lowering the benchmark rate to 0.3 percent last month, and a 5 trillion yen ($52 billion) stimulus plan announced by Prime Minister Taro Aso last month risks worsening the public debt.

Quarter-on-quarter, Japan's economy shrank 0.1 percent, today's report showed. Capital spending fell 1.7 percent from the previous three months, compared with economists' expectations of a 2 percent drop.

Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The carmaker will fire 3,000 workers by March, and the Nikkei newspaper reported this month that it will delay adding capacity at a domestic plant that makes Lexus sedans.

Canon, the world's largest camera maker, last month forecast profit growth would fall for the first time in nine years and said it will cut capital spending 4.7 percent in 2008 to 410 billion yen.

Net exports subtracted 0.2 percentage point from growth after imports outweighed an increase in shipments abroad. Exports rose 0.7 percent, less than the 1.2 percent expected. Imports climbed 1.9 percent as oil surged to a record in the quarter. Economists predicted a 1.5 percent gain.

Economic growth in China, which became Japan's biggest customer in July, slowed to 9 percent last quarter, the weakest since 2003.

Still, Japan will probably suffer less than its biggest counterparts after companies shed debt and streamlined labor forces following the bursting of the property and asset bubble in the early 1990s. Asia's biggest economy will shrink 0.1 percent next year, according to the Organization for Economic Cooperation and Development, less than the 0.9 percent and 0.5 percent contractions in the U.S. and Europe.

Consumers are getting some relief as inflation abates and the government prepares to provide households with at least 12,000 yen ($125) each as part of the stimulus plan. Consumer spending increased 0.3 percent last quarter, more than the 0.1 percent economists expected, today's report showed.

The ratio of jobs to applicants has fallen for eight months and the deteriorating profit outlook for companies is also putting pressure on wages. Winter bonuses, which typically account for about 10 percent of a fulltime worker's annual pay, will fall 2.9 percen...