Japan Contraction Piles Pressure on Noda, Central Bank: Economy

Japan’s Economy Shrinks At Fastest Pace Since Earthquake
People cross an intersection at night in the Shibuya district of Tokyo, Japan. Photographer: Noriko Hayashi/Bloomberg

Japan’s economy shrank last quarter as exports tumbled and consumer spending slumped, putting pressure on the central bank to add stimulus and hurting Prime Minister Yoshihiko Noda’s record as he prepares for elections.

Gross domestic product fell an annualized 3.5 percent, the most since the earthquake and tsunami in early 2011, Cabinet Office data showed today in Tokyo. The median of 23 estimates in a Bloomberg News survey was for a 3.4 percent decline. Shipments to Asia, Europe and the U.S. all slid, as did capital spending.

With analysts also seeing a GDP decline this quarter, according to a Bloomberg survey last week, Japan faces the risk of its third textbook-definition recession since 2008. The deterioration may undermine plans by Noda to implement the nation’s first sales-tax rise in more than a decade, and raises the stakes of a political impasse that’s left the government running out of cash.

“Today’s bad economic numbers deliver unpleasant news for Noda,” said Hiroshi Shiraishi, senior economist at BNP Paribas SA in Tokyo, who accurately forecast the GDP figure. “It will take a while for Japan to get back to a sound recovery, considering a modest pick-up in the global economy at best and the country’s damaged relationship with China.”

Exports to China have been undermined by anti-Japanese sentiment in the aftermath of the Noda administration’s purchase from a private owner of islands that China also claims.

Falling Stocks

The yen was little changed at 79.49 per dollar as of 2:29 p.m. in Tokyo. The Nikkei 225 Stock Average, which is down about 15 percent from this year’s high in March, fell 0.7 percent.

In the region, India’s industrial production fell 0.4 percent in September from a year earlier the government reported. The median estimate in a Bloomberg news survey was for a 2.8 percent rise. Inflation in October rose to 9.75 percent on year, the government reported.

Today’s data showed that Japan’s economy is approaching its smallest size since at least 1993, with nominal GDP recording its third-lowest level since the current data series began.

The world’s third-largest economy will probably shrink at an annual pace of 0.4 percent this quarter, according to the median forecast of 24 economists surveyed by Bloomberg News. That would be the third technical recession since 2008. Japanese recessions are officially defined by a government-charged panel that considers data beyond GDP figures.

Technical Recession

On a quarterly basis, the economy shrank 0.9 percent in the July-September period, today’s data showed.

Private consumption posted the first back-to-back drop last quarter since the six months through March 2009, declining 0.5 percent from the previous quarter as government subsidies for fuel-efficient cars ended. Capital investment dropped 3.2 percent, the steepest decline since the second quarter of 2009.

“The GDP figures were grim,” Noda said in parliament after the data release, as he pledged to instill a “sense of urgency” in his government’s economic policy.

Even as Noda retains the option of a supplemental budget, his room for fiscal maneuver has been limited by the political opposition’s refusal to give his administration the authority to borrow to pay for this year’s deficit amid a dispute over the timing of an election that the prime minister has pledged to call “soon.” Debate on issuing debt to cover about 40 percent of spending for this fiscal year began in the Diet last week.

Tax Hike

The worsening economy also threatens Noda’s plan to rein in Japan’s public debt, which is the highest in the world. Legislation passed in August to increase the sales tax to 8 percent in April 2014 and to 10 percent in 2015 allows the rise to be canceled based on an assessment of economic conditions.

“Bond market players may start to discount the probability of a tax rise in 2014,” which could really destabilize the Japanese government bond market, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former Bank of Japan official.

In Europe, Denmark reports inflation for October. In Latin America, Mexican industrial production in September probably rose 3.1 percent from a year earlier, the smallest increase since March, according to the median of 16 estimates in a Bloomberg News survey.

The Bank of Israel will publish minutes of its October meeting, where policy makers unexpectedly cut the benchmark rate to a 22-month low.

More Easing

BOJ Governor Masaaki Shirakawa and his colleagues expanded their asset-purchase program for the second time in two months on Oct. 30. Some BOJ board members said in an Oct. 4-5 meeting that the economy may have entered a “recessionary phase,” the minutes of the meeting showed.

“Given today’s weak numbers, I have no doubt the BOJ will remain under strong political pressure for more action,” said BNP Paribas’ Shiraishi.

The central bank may add to stimulus at a Dec. 19-20 meeting if the U.S. Federal Reserve also acts at its gathering on Dec. 11-12, said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former central bank official. American monetary expansion risks weakening the dollar and driving up the yen, making Japanese exports less competitive.

Japanese companies have been hurt by the worsening economy, with data compiled by Bloomberg showing an aggregate 31 percent decline in net income at the 191 companies listed on the Nikkei 225 Stock Average to report July-to-September earnings through last week.

Corporate Losses

Sharp Corp. and Panasonic Corp. expect to lose a combined 1.2 trillion yen ($15 billion) this fiscal year, while Hitachi Construction Machinery Co. and Nissan Motor Co. cut their full-year profit forecasts and cosmetics company Shiseido Co. plans to cut costs.

Machinery orders, an indicator of capital spending, fell the most in four months in September, data showed last week, while industrial production slid the most since the earthquake and exports dropped 10 percent.

In nominal terms, the economy contracted an annualized 3.6 percent in the third quarter, today’s data showed.

Net exports, or shipments less imports, subtracted 0.7 percentage point from GDP on a quarterly basis, the biggest decline in three quarters. Public investment rose 4 percent in the period, the third quarter of growth.

The GDP deflator, a measure of price changes across the economy, fell 0.7 percent last quarter from the same period of 2011.

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