Japanese Economy Slides Into Recession

The Associated Press - May 19, 2011

Japan's economy contracted sharply in the first quarter, veering back into recession as factory production and consumer spending wilted in the aftermath of March 11 earthquake and tsunami.

Real gross domestic product — a measure of the value of all goods and services produced domestically — shrank at an annualized rate of 3.7 per cent in the January-March period, the Cabinet Office said Thursday.

The result marks the second straight quarter that the world's No. 3 economy has lost steam and undershoots an annualized 2.3 per cent fall forecast in a Kyodo News agency survey.

While there is no universally accepted definition of a recession, many economists define it as two consecutive quarters of GDP contraction. Others consider the depth of economic decline as well as other measures like unemployment.

Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said there is "no doubt" that recession has returned. More surprising is just how quickly the economy crumpled, he said.

The latest GDP report includes just 20 days following the disaster, but "the impact is huge," said Schulz, who had expected to see most of the economic fallout in the second quarter.

The magnitude-9.0 earthquake and tsunami left more than 24,000 people dead or missing, and wiped out entire towns in the hardest-hit areas. Damage is estimated at $300 billion US, making it the most expensive natural disaster in history.

Economic ripples

It damaged factories in the region, causing severe shortages of parts and components for manufacturers across Japan, especially automakers. A crippled nuclear power plant caused widespread power shortages that added to the headaches faced by businesses and households.

As a result, Japan's factory production and consumer spending both fell the most on record in March. Exports in March went south for the first time in 16 months. Companies are reporting lower earnings and diminished outlooks for the rest of the fiscal year.

The recent events have deeply unnerved households, who are likely to remain cautious for the coming months, Schulz said.

"The nuclear disaster showed just how much is wrong in Japan actually," he said. "And many things that seemed so stable and sure like electricity supply ... are looking not safe at all."

Falling profits

Toyota Motor Corp., Japan's biggest automaker, said last week that its quarterly profit tumbled more than 75 per cent because of parts shortages after the tsunami. As of May, the crisis cost the company production of 550,000 vehicles in Japan and another 350,000 overseas.

Toyota is expected to lose its spot as the world's top-selling automaker to General Motors Co. this year.

Even before the disaster, Japan's economy was shaky.

In a historic shift, China overtook the country as the world's No. 2 economy last year. Japan struggled to address a slew of problems including years of deflation, a rapidly aging and shrinking population, and ballooning public debt. Japanese companies increasingly relied on exports to drive growth and offset the persistently lackluster demand at home.

After four solid quarters of growth, Japan's GDP turned negative in the last three months of 2010 due to weaker exports and consumer demand. The downturn was expected to be temporary.

Instead, Japan has now recorded consecutive quarters of contraction for the first time since the global financial crisis. GDP fell for four straight quarters starting April 2008.

Japan's economy and fiscal policy minister Kaoru Yosano described the current slump as milder than the previous slide, when global demand "evaporated instantly."

"The Japanese economy's ability to rebound is sufficiently strong," Yosano said, according to Kyodo News agency.

Goldman Sachs said the economy will likely bottom in the second quarter. It expects GDP to begin growing again in the third quarter as reconstruction bolsters demand in both the private and public sectors.

"We assume the production and exports will shift to mild growth facilitated by supply chain restoration, although power supply is an uncertain factor," chief Japan economist Naohiko Baba said in a report to clients.

The first-quarter GDP figure translates to a 0.9 per cent fall from the previous three month period, according to the Cabinet Office data.

Consumer spending, which accounts for some 60 per cent of the economy, declined 0.6 percent. Capital investments by companies retreated 0.9 percent from the October-December quarter.

To fund recovery spending, Japan's parliament passed at 4 trillion yen ($49 billion) budget supplement earlier this month. Further government outlays are expected to follow in the months ahead.

The money will be used to build new houses for the more than 100,000 people who remain without proper shelter, clear debris and rubble, restore fishing grounds, and provide support for disaster-hit businesses and their employers.

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