Japan’s Economy Shrinks 0.9 Percent in Third Quarter

on Nov 12, 2012
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Japan’s gross domestic product fell an annualized 3.5 percent last quarter as exports tumbled and consumer spending plunged. The fall in GDP was larger than the 3.4 percent forecast by a Bloomberg News survey.

In front of parliament Prime Minister Yoshihiko Noda described the newly released macroeconomic figures as “grim”. According to Seiji Maehara, Japan’s minister of the economy, the country had possibly entered a “recessionary phase”. The downturn in the economy threatens Mr Noda’s plans to reduce public debt, which is the highest in the world. This summer legislation was passed to implement Japan’s first sales-tax rise in more than ten years increasing the tax rate to 8 percent starting April 2014 and 10 percent in 2015.

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**Textbook Recession**
In the third quarter Japan’s economy contracted by 0.9 percent due to a sharp fall in consumer spending and steeper than forecast decline in capital expenditure.
“The GDP data confirms that the economy has fallen into a recession,” said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “It is set for a second straight quarter of contraction in the current quarter.” Two consecutive quarters of contraction is a common “textbook” definition of recession.

!m[Slowdown in Exports and Weak Consumer Demand Could Push Japan into Recession](/uploads/story/766/thumbs/pic1_inline.png)With the debt crisis in the Eurozone and weak recovery in the US, many investors have flocked to safe-haven assets such as the yen, resulting in the Japanese currency strengthening against the euro and the US dollar. Since March this year the yen has gained 5 percent against the US dollar and 8 percent against the euro, making Japanese goods more expensive for Americans and Europeans and dampening demand. Net exports, or shipments less imports, subtracted 0.7 percent from GDP on a quarterly basis, the biggest drop in three quarters

“The decline in exports seems large. Consumption and capital expenditure were also weak, showing that both external and domestic demand are weak,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute in Tokyo. “Economic data deteriorated sharply from September, and this means Japan is already in recession,”
Private consumption, which accounts for 60 percent of GDP, fell 0.5 percent in the third-quarter against a forecast 0.6 percent drop. Capital expenditure plunged 3.2 percent as companies turned more pessimistic about growth prospects domestically and overseas.

**Bank of Japan Stimulus Programme**
Earlier this month the Bank of Japan extended its asset purchase programme by 11 trillion (£86 billion) to counter what it called a “weakening” of domestic demand, caused by a slowing in industrial production and exports.
Many analysts believe that if the US Federal Reserve decides on more stimulus at a 11-12 December meeting, BoJ will follow suit and take action at its gathering on 19-20 December.
In a speech on Monday, Masaaki Shirakawa, Bank of Japan governor, said there was “no question that the [central bank] should exert every effort to enhance its easing effects as much as possible”. He said domestic demand was “unlikely to increase at a pace that will outperform the weakness in exports”. However the head of BoJ also stressed that flooding the markets with cash alone wouldn’t successfully stimulate the economy when interest rates are kept near zero. The government should boost GDP by implementing structural reforms and deregulation.

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