Japan economy shrinks at fastest pace in 35 years

February 15, 2009 6:31:36 PM PST
Japan's economy contracted in the fourth quarter at the fastest pace in 35 years as a collapse in global demand continues to drain the life from the world's second-largest economy. Japan's gross domestic product, or the total value of the nation's goods and services, dropped at an annual pace of 12.7 percent in the October-December period, the government said Monday. That's the steepest drop for Japan since the oil shock of 1974.

It far outpaces declines of 3.8 percent in the U.S. and 1.2 percent in the euro zone.

The contraction underscores the vulnerability of Asia's export-driven economies during global downturns and point toward more cuts in jobs, production and profits in the coming months.

A survey of economists by the Kyodo news agency had projected an 11.6 percent fourth-quarter contraction.

Japan had its third straight quarter of decline. The GDP fell 1.8 percent in the July-September period.

Fourth-quarter GDP fell 3.3 percent from the previous three-month period, and for 2008, it contracted 0.7 percent - the first decline in nine years, according to the Cabinet Office.

With a rebound nowhere in sight anytime soon, Economy Minister Kaoru Yosano said Japan faces "the worst economic crisis in the postwar era," according to Kyodo.

The three main pillars underlying Japan's emergence from the so-called "lost decade" of the 1990s have crumbled, said Martin Schulz, an economist at Fujitsu Research Institute in Tokyo.

Between 2003 and 2007, Japan's GDP grew an average of 2.1 percent every year. But the expansion relied heavily on favorable exchange rates, overseas investment and demand, and old industry - steel, cars and chemicals.

"The recovery was unsustainable," Schulz said. "It was built on a major global bubble, and now basically the economy is paying the price."

Japan's real exports plummeted a record 13.9 percent in the fourth quarter, the government said, as the deepening global slowdown choked off demand for the country's cars and gadgets. Even demand from emerging markets, which earlier had partly offset declines in North America and Europe, began falling sharply in the fourth quarter.

An appreciating yen also hurt the country's exporters, including Toyota Motor Corp. and Sony Corp.

Japanese electronics company Pioneer Corp. said last week it will cut 10,000 jobs globally, joining a growing list of the country's corporate giants scrambling to slash their payrolls. Sony Corp. is shedding 8,000 workers, while Nissan Motor Co. and NEC Corp. are each cutting 20,000.

Japan slipped into recession in the third quarter after its GDP contracted an annualized 3.7 percent in the April-June period. A recession is commonly defined as two consecutive quarters of negative growth, though many economists using other parameters say the current downturn actually began in late 2007.

In its latest forecast, the International Monetary Fund predicts Japan's economy will shrink 2.6 percent this year, outpacing the 2 percent overall decline it expects for advanced economies. Media reports over the weekend said Japan may be considering additional measures to shore up its economy with fresh spending likely to top 10 trillion yen ($109 billion).

Lawmakers are debating a record 88.5 trillion yen ($963 billion) budget for the fiscal year starting in April. The Yomiuri Shimbun said once parliament passes the budget, Prime Minister Taro Aso - who faces dismal approval ratings - will announce the extra economic measures.

Japan passed a supplementary budget in January that includes a cash payout to taxpayers totaling 2 trillion yen ($21.8 billion). Aso has championed the idea, saying it will stimulate sagging consumer spending.

Critics, however, have described the handouts as a lavish waste of public money with limited impact.

"With an election coming up, we believe Japanese policy will tend to put priority on boosting approval ratings rather than GDP," said Kyohei Morita, chief economist at Barclays Capital in Tokyo, in a recent report.

Japan's central bank, which lowered its key interest rate to 0.1 percent in December, has introduced various steps to try to thaw a corporate credit crunch. But there is little it can do to address the unprecedented decline in external demand.

The Bank of Japan policy board is scheduled to start a two-day meeting Wednesday.

In stock markets, the benchmark Nikkei 225 index was down 0.99 percent at 7,702.24.

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