Japan's Housing Slump Threatens Growth, Ministers Say (Update1)

Nov. 2 (Bloomberg) -- Japan's worst housing slump in four decades and rising oil prices threaten growth in the world's second-largest economy, Cabinet ministers said.

``There is concern that a decline in housing investment will become a factor pushing down gross domestic product,'' Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo today. ``I'm more focused on the downside risks to the economy.''

Housing starts fell 44 percent in September and 43.3 percent in August because of stricter rules for obtaining building permits. The government this week said it would relax the regulations after industry criticism that they were too onerous.

``We've heard that the Land Ministry has taken some measures, but there will be some impact in any case,'' Finance Minister Fukushiro Nukaga told reporters.

The Bank of Japan this week cut its economic growth forecast to 1.8 percent from 2.1 percent for the year ending March, in part because of the drop in construction activity.

Credit Suisse Group today said the economy will expand 1.3 percent in the period, slower than the 1.7 percent predicted last month and 2.9 percent estimated in July.

``The slump in construction investments may hurt manufacturers, dragging down industrial production and capital investment,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse and a former central bank official.

Oil Prices

Crude oil climbed higher than $96 a barrel for the first time yesterday and has risen 53 percent this year. The gains may ``hurt profits of small and medium-seized companies,'' Ota said. Nukaga said he's watching the effect of higher energy costs on the economy.

The ministers also highlighted the risk that the U.S. housing recession may deepen, slowing growth in Japan's biggest export market.

``The U.S. housing slump is gradually affecting the nation's economy,'' Ota said. Still, she said the impact on Japan of the subprime mortgage collapse will probably be limited.

``We have to monitor the effect of financial-market movements and the subprime issue on the Japanese economy,'' Nukaga said. ``If there were any changes to the U.S. economy, Japan would be affected as well.''

Japan's economy grew an annualized 1.8 percent in the three months ended Sept. 30, according to the median estimate of 22 economists surveyed by Bloomberg News. The government will release its report on third-quarter GDP on Nov. 13.

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.netKeiko Ujikane in Tokyo at kujikane@bloomberg.net

To contact the editor responsible for this story: David Tweed at dtweed@bloomberg.net.