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Japan’s Deepening Slump Heightens Pressure for Faster Stimulus

Japan’s Economy Shrinks More Than Forecast After Quake
The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending and that was reliant on exports for growth. Photographer: Tomohiro Ohsumi/Bloomberg

Japanese consumers are making deeper cutbacks after the March 11 earthquake than anticipated, heightening the urgency for policy makers to unveil measures to end the nation’s third recession in a decade.

Household spending had the largest back-to-back quarterly drop since the global financial crisis, the Cabinet Office said yesterday. The figures contrast with comments by Japan’s central bank, which refrained from adding more stimulus today, that the economy’s main challenge is one of supply chain disruptions caused by the earthquake, tsunami and nuclear crisis.

Prime Minister Naoto Kan, whose public approval rating is less than 30 percent, has held off on outlining the scale of further reconstruction spending as officials gauge the impact of an initial 4 trillion yen ($49 billion) package. BOJ Governor Masaaki Shirakawa has taken a similar stance since the central bank expanded its asset-purchase fund on March 14.

“Speed is key here, and the government needs to act,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “A delay in the second budget is not only going to postpone the economy’s return to growth, but it’s also going to reduce Japan’s capacity to grow in the long run. Companies aren’t going to invest in a country that takes forever to rebuild itself.”

GDP shrank an annualized 3.7 percent in the three months ended March, almost double the pace that economists projected and the biggest contraction since the financial crisis. Consumer spending slumped 0.6 percent, worse than economist projections for a 0.4 percent drop.

Household Cut Back

Households cut back on eating out and entertainment after the disaster disrupted power and transportation and left more than 24,000 dead or missing. Companies also slashed spending on plant and equipment and drew down on inventories.

“I see this as only a temporary phenomenon,” Economic and Fiscal Policy Minister Kaoru Yosano told reporters in Tokyo yesterday. He said the situation was “fundamentally different” from the financial crisis, when demand plunged globally.

The BOJ’s Shirakawa has repeatedly said since the quake that the economy will recover as power shortages and supply constraints recede later in the year.

Tokyo Electric Power Co. reported a 1.25 trillion yen loss today, exceeding the largest corporate loss so far, Nippon Telegraph & Telephone Corp.’s 812 billion yen deficit in the year ended March 2002, according to data compiled by Bloomberg.

Resisting Calls

Japanese banks are resisting government calls for lenders to support Tokyo Electric by forgiving loans or easing interest charges. Masayuki Oku, chairman of the Japanese Bankers Association, said yesterday banks aren’t considering writing off or cutting interest payments on existing loans.

Japan’s GDP is now near a 20-year low in nominal terms, a reminder of the entrenched deflation that was weighing on growth even before the temblor disrupted production and spending.

The Bank of Japan’s policy board unanimously voted today to maintain a 30-trillion yen credit program and a 10 trillion yen asset-purchasing fund that represents the bank’s main policy tools, and kept the benchmark overnight rate at zero to 0.1 percent. Deputy Governor Kiyohiko Nishimura dropped the proposal he made last month of expanding the fund to kickstart growth.

The yen was little changed after the central bank’s decision, trading at 81.72 against the dollar at 3:30 p.m. in Tokyo. All 14 economists surveyed by Bloomberg News expected no change in monetary policy today.

“This decline in GDP is huge, and the BOJ may have to take additional steps to ease policy,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. That monetary stimulus may come this summer to match the timing of when the government unveils its second extra budget, he said.

May Expand

Shirakawa has said the BOJ may expand its asset-purchase program if needed.

Predictions by Yosano and Shirakawa that underlying demand will remain intact may prove too optimistic. While an increase in machinery orders point to an improvement in business spending in coming months, wages slipped in March for the first time in more than a year, payrolls slumped the most in two years and household sentiment slumped by a record in April.

Data for April suggests the economy will continue shrinking this quarter. Exports, traditionally Japan’s biggest driver of growth, slid 12.7 percent in the first 20 days of April from a year earlier as supply-chain disruptions held back manufacturers.

Renesas Electronics Corp. is among companies that are restarting their damaged factories. Net loss at the world’s biggest maker of microcontrollers used in cars, mobile phones and cameras widened to 115 billion yen in the year ended March, the company said this week.

Relief Package

So far, Kan has pushed through a relief package to build temporary homes and clean up debris in the northeast region, where the quake did the most damage. Planning a second budget will be harder as policy makers must agree how they will finance the extra spending with a debt burden already twice the size of the economy. Calls for a bigger additional relief package will intensify as signs of a deteriorating economy abound, according to Yasunori Sone, a political science professor at Tokyo-based Keio University.

Former Bank of Japan deputy governor Toshiro Muto said damage from the quake may linger. Power shortages sparked by a nuclear accident in Fukushima may force companies to relocate overseas, sapping spending and jobs at home.

“My biggest concern is the possibility of companies moving factories abroad,” Muto, now head of the Daiwa Institute of Research, said yesterday. “Some companies may have already started considering that. When that turns to reality, we may see a hollowing out of the Japanese economy.”

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