Economy shrank 3% last quarter


The economy shrank 3 percent last quarter, the steepest contraction since 2001, as companies and households cut spending and exports fell.

Gross domestic product for the three months that ended on June 30 shrank more than the annualized 2.4 percent initially estimated, the Cabinet Office said Friday. Economists expect the slowdown to continue into next year as the U.S. slowdown spreads to Asia, where Japan ships half its exports.

The next prime minister will have little money to spend on an economy that may be in a recession, because public debt is about 1.8 times the size of GDP. Economic and fiscal policy minister Kaoru Yosano, one of five candidates to replace Yasuo Fukuda, who resigned this month, said last week that there’s “nothing to be done but wait” for export markets to recover.

“Japan’s economy will keep slowing at least until the end of this year,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo. “Compared with previous recessions, this one will be very shallow. We’re at the deepest point of the downturn now.”

Economists surveyed by Bloomberg News expected the economy to contract 3.1 percent.

Stalled growth and the fastest inflation in a decade have created a dilemma for the Bank of Japan, which will probably have to keep interest rates unchanged for the rest of the year, according to economists surveyed this week. At 0.5 percent, Japan’s key rate is the lowest among major economies.

BOJ Gov. Masaaki Shirakawa said last week growth in the world’s second-largest economy is likely to “remain sluggish for the time being.”

From the first quarter, the economy shrank 0.7 percent, the biggest drop since the third quarter of 2001, when Japan was in a recession, and more than the 0.6 percent initially reported. Economists expected a 0.8 percent contraction.

Business spending slid 0.5 percent, more than twice the pace of the 0.2 percent drop reported last month. The revision reflected Finance Ministry figures last week that showed capital spending fell for a fifth quarter.

Consumers also reduced spending 0.5 percent, deterred by prices that rose faster than wages. Compensation adjusted for inflation fell 0.4 percent as higher fuel and food prices ate into paychecks.

Slumping U.S. demand has forced exporters, including Toyota Motor Corp., to cut production and jobs. A Kyushu-based Toyota subsidiary has reduced output of sport utility vehicles by at least 10 percent and fired 800 workers since June.

Markets outside the U.S. are also deteriorating. The European economy shrank for the first time in almost a decade last quarter, and EU Commissioner Joaquin Almunia said this week that the outlook is “unusually uncertain.”

Sales of construction equipment by companies including Komatsu Ltd. will fail to meet industry forecasts because of lower demand from India and China, the Japan Construction Equipment Manufacturers Association said last month.

“The market is heading into a turning point,” said Michijiro Kikawa, chairman of the association and president of Hitachi Construction Machinery Co. “Although we expect the strength of emerging markets to continue, the speed of growth will decelerate.”

Exports dropped 2.5 percent and imports fell 2.6 percent, Friday’s report showed. Net exports subtracted 0.1 percentage point from GDP, the first negative contribution in three years.

Even as exports weaken, economists say companies are better able to withstand the slowdown because they have shed excess workers, factory lines and debt that contributed to a decade of economic stagnation in the 1990s.

“Japan’s economy is weak because foreign demand is slumping and the terms of trade have been worsening, not because there are any big domestic structural problems,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Further declines in oil prices, which have eased 30 percent since reaching a record in July, will benefit Japan even more than other economies, according to Julian Jessop, chief international economist at Capital Economics Ltd. in London. Jessop said Japan escaped the credit crunch and the housing collapse that’s hit the U.S. and Europe.