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Thursday, Aug. 14, 2008

2.4% decline in GDP spells recession

Biggest plunge in seven years beats forecasts


Staff writer

The economy shrank at an annualized pace of 2.4 percent in the second quarter, the government said Wednesday, posting Japan's first negative growth in a year and signaling the approach of a recession linked to rising oil prices and a slowdown in the United States.

In a report Wednesday, the Cabinet Office said that declining exports and domestic spending caused gross domestic product to contract, reversing the annualized 3.2 percent growth logged in the previous quarter to March. The contraction was worse than the 2.3 percent median estimate of 29 economists surveyed by Bloomberg.

It is also the biggest drop in seven years, when GDP shrank by an annualized 4.4 percent in July-September 2001.

"It confirmed the fact that Japan is in recession," said Yoshimasa Maruyama, an economist at BNP Paribas in Tokyo. "The economy as a whole is growing weak."

Industrial production has fallen two straight quarters, indicators released by the Cabinet Office are lower and the government downgraded its assessment of the economy in its monthly report last week, according to Maruyama.

He added that the growth rate in the coming quarter or two will probably be around zero because the U.S. and European economies are still weak, which means Japan can't depend on exports for a boost.

"Severe conditions are likely to continue through the first half of next year," he said.

This means, he said, the Bank of Japan will not be able to raise its benchmark interest rate until around 2010, when the economy will likely show a stronger trend. The BOJ will hold a Policy Board meeting next week.

GDP, the broadest measure of economic activity, in April-June contracted 0.6 percent on a quarterly basis from the previous quarter.

In nominal terms, which exclude price changes, the economy contracted 0.7 percent in the quarter, or an annualized contraction of 2.7 percent.

Major GDP categories also plunged from the previous quarter.

Consumer spending, which accounts for more than half of Japan's GDP, dropped 0.5 percent and housing investment plunged 3.4 percent. Exports fell 2.3 percent while imports dropped 2.8 percent.

While many analysts focus on the real GDP growth rate, Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo, said he puts more weight on the nominal GDP, which shows the scale of the economy.

"Because the GDP growth rate was high in the previous two quarters, it looks like the economy is growing moderately," Shirakawa said. "But the nominal GDP shows the economy has been shrinking since the first quarter of 2007."

Nominal GDP in January-March 2007 was ¥517.3 trillion but has been on a downtrend since then, with the latest figure at ¥511.8 trillion.

"The revenue of everybody is dropping . . . the government, businesses and individuals," Shirakawa said.

The government is planning to unveil a stimulus package by month's end and Wednesday's negative GDP figures may push politicians to boost its size. But Shirakawa is skeptical whether such a move will help the economy in the long term.

"With tax revenue likely to decline, worries about social welfare costs will rise if the government debt balloons due to an increase in government bond issuance," he said. "I'm not sure if consumers will be motivated to increase spending under such circumstances."

In the long run, the government is better off carrying out fiscal reform and ensuring financial resources for social welfare costs, rather than considering such measures as slashing highway tolls, Shirakawa said.



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