Recession is back in Japan after a seven-year hiatus, and fingers this time are pointing outside the country as the latest global boom quickly deteriorates into bust.
Government data Monday showed that the economy contracted at an annual pace of 0.4 percent in the July-September period after falling an annualized 3.7 percent in the second quarter. That means Japan, along with the 15-nation euro-zone, is now technically in a recession, commonly defined as two straight quarters of contraction.
Previous downturns, including the so-called lost decade of the 1990s, were largely self-inflicted, exacerbated by ineffective fiscal and monetary policies. But now more than ever, the fortunes of the world’s second-largest economy rise and fall on the habits of consumers around the world.
Japan has long relied on exports of its cars and gadgets to fuel growth. However, the country’s companies have had little choice in recent years but to expand aggressively overseas in the face of a shrinking home market.
Between 2002 to 2007, Japan’s gross domestic product grew an average 2.1 percent, of which 40 percent came from external demand, said Masamichi Adachi, an economist at JPMorgan Securities in Tokyo.
“Basically, the late 1990s were driven by Japan’s own financial crisis,” he said. “The financial system now is much more sound compared to the late 1990s and also relative to the U.S. or Europe. But the vulnerability (to external demand) is probably worse now than in the 1990s.”
Indeed, Japan’s economy has shed the excess labor, debt and capacity that hamstrung the economy in the 1990s. Corporate balance sheets are healthy, and banks weathered the subprime crisis with far smaller losses than their Western counterparts.
Glen Maguire, chief Asia economist at Societe Generale, describes the current recession as a “purely cyclical adjustment” as opposed to the “structural adjustments” of the 1990s.
“What we’re starting to see is the extent of deterioration in external demand start to weigh more heavily on the Japanese economy,” said Glen Maguire, chief Asia economist at Societe Generale. “And I think looking forward, there’s every indication that dynamic is going to continue.”
The weaker-than-expected third quarter results stemmed mainly from a sharp pullback in corporate investment amid the unfolding global financial crisis and sputtering global demand. Economists surveyed by Kyodo News agency had predicted an annualized 0.1 percent rise in the third quarter.
Hurt also by a stronger yen, a growing number of exporters big and small are slashing their future expectations for profit, sales and spending.
Toyota Motor Corp., for example, has cut net profit full-year profit forecast to 550 billion yen ($5.5 billion) — about a third of last year’s earnings. And Sony Corp., whose July-September profit plunged 72 percent, expects to make 59 percent less this fiscal year than last year.
But the worst may be yet to come, since the third-quarter data do not fully reflect the impact of Lehman Brothers’ collapse in mid-September. Many economists forecast another three to four quarters of negative growth.
Still, Jesper Koll, CEO of hedge fund Tantallon Research Japan, warned against pointing to obvious scapegoats for Japan’s latest woes.
The domestic economy began faltering in the summer of 2007 under higher taxes and a credit crunch in the consumer finance industry, he said. Regulatory debacles, including a massive pension scandal and confusion over new construction regulations, added to the worsening conditions.
“The easiest thing to say is we blame it on America, we blame it on the world,” said Koll, a former chief economist for Merrill Lynch in Tokyo. “But the fact of the matter is, domestic mistakes, domestic policy tightening, is just as much to blame.”
Compared to the previous quarter, GDP shrank 0.1 percent, the Cabinet Office said. Business investment dropped 1.7 percent from the previous quarter.
Economy Minister Kaoru Yosano said following the data’s release that “the economy is in a recessionary phase.”
Since taking office in late September, Japanese Prime Minister Taro Aso has unveiled two economic stimulus packages in an effort to cushion the blow. His latest 27 trillion-yen ($275.7 billion) proposal includes expanded credits for small businesses and a total of 2 trillion yen ($20.4 billion) in cash pay outs to households.
The Bank of Japan at its last meeting cut its key interest rate for the first time in more than seven years, lowering it to 0.3 percent, joining central banks around the world in trimming borrowing costs.
The Organization for Economic Cooperation and Development says Japan’s economy will shrink 0.1 percent next year, compared with a 0.9 percent contraction in the U.S. and a 0.5 percent pullback in Europe.
Monday’s data also showed that net exports sapped 0.2 percentage point from growth, as the high cost of importing fuel eclipsed a slight increase in outbound shipments. Imports rose 1.9 percent, while exports grew 0.7 percent.
Private consumption, which accounts for more than half of inflation-adjusted GDP, increased 0.3 percent from the previous quarter. However, the rebound in consumer demand is unlikely to last, economists say.