Quarter's 'severe numbers' may spur BOJ to act

GDP drop puts Japan in a mild recession

Kyodo

The economic recovery halted in the third quarter of calendar 2012 on the global downturn, government data showed Monday, reinforcing the view that Japan is in a mild recession and putting further pressure on Prime Minister Yoshihiko Noda ahead of an election that could be held before the end of next month.

Gross domestic product contracted a real 0.9 percent, or an annualized 3.5 percent, from the previous quarter, with the Cabinet Office also downgrading the result for the final quarter of 2011 to negative territory.

The poor outcomes increase the prospects that the government and the Bank of Japan will take additional measures to boost the economy.

“I think they are severe numbers . . . we will respond with a sense of crisis,” Noda told the Lower House Budget Committee.

The deceleration, widely expected by analysts, whose consensus was for a 4.1 percent contraction in a Kyodo News survey, reflected weaker domestic and external demand. Exports marked their sharpest fall in more than a year on slowdowns in the nation’s trading partners, particularly China.

The recently earmarked ¥400 billion in stimulus measures came as the government “felt the downturn,” Noda said, reiterating that an additional emergency package to underpin the economy will follow before the end of this month.

Many economists project a continued deceleration in the following quarter, sharing the view that the economy is heading for a technical recession, defined as two consecutive quarterly contractions.

“Japan is in a short recession,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan Co., who said that any resumption in economic expansion will depend on whether exports recover and if there are positive spillover effects on domestic production and consumption.

The government echoed this assessment, with economic and fiscal policy minister Seiji Maehara telling reporters he “cannot deny the possibility that the Japanese economy has entered into a recessionary phase.”

Private consumption, the biggest component of GDP, also dragged down the economy, dropping a real, or inflation-adjusted, 0.5 percent in the three months through September, compared with a downwardly revised minus 0.1 percent in the previous quarter, on diminished effects from the government’s subsidy program for the purchase of environmentally friendly vehicles. The stimulus measure ended in September.

Corporate capital spending fell 3.2 percent due largely to sluggish results at manufacturers, including carmakers, the Cabinet Office said.

Bucking downward pressures, housing investment grew 0.9 percent for the second straight quarterly gain, reflecting robust home-building, while government spending rose 4.0 percent, up for the third straight quarter, on work to rebuild from the March 2011 earthquake and tsunami.

The negative growth in the overall economy — the worst since it shrank an annualized 8.0 percent in the first quarter of 2011 following the natural disasters — was the first deceleration in three quarters.

The government also downwardly revised the result for the October-December quarter of 2011 to minus 0.3 percent from an earlier reported plus 0.1 percent. The downgrading reflected the worse than expected impact on the economy, mainly exports, of the stronger yen and the massive flooding in Thailand during the period.

The economic slump could lead to additional political pressure on the BOJ to ease monetary policy and support economic activity, despite the central bank’s having done so in September and October.

The slump may also complicate Noda’s timing for a Lower House dissolution and general election, which he vowed months ago to call “soon.” Noda, hit by falling Cabinet approval ratings, has been fending off calls for the election because his Democratic Party of Japan is expected to fall from power.

Now that a crucial standoff with the Liberal Democratic Party and New Komeito, the main opposition parties, has eased over the bill to allow the government to issue deficit-covering bonds to cover this year’s budget, speculation has mounted that he will call an election by the end of December.

In nominal terms, unadjusted for price changes, GDP shrank 0.9 percent, or an annualized 3.6 percent.

The GDP deflator, a wider price gauge than the consumer price index, fell 0.02 percent, signaling the economy has remained under deflationary pressure.

Domestic demand pushed GDP lower by 0.2 percentage point, while external demand, or net exports, trimmed it by 0.7 point.

Exports fell 5.0 percent, the sharpest decline in five quarters, on the slowing world economy amid the sovereign debt crisis in Europe. The crisis spread its negative impact outside the area through trade and financial channels, with emerging market economies such as China, Japan’s biggest trading partner, seriously affected.

Japanese shipments to the United States, the European Union and Asia all decelerated. By product, vehicles and electronic devices were especially weak, the government said. Imports fell 0.3 percent, reflecting weaker domestic industrial output, as well as lower crude oil and other energy costs.