Japan's Economy Shrinks 3.5 Percent in Third Quarter

By Elaine Kurtenbach 12 November 2012

TOKYO—Japan’s economy shrined in July-September, its first contraction in three quarters, foiling hopes for a rebound and signaling to many economists it may already be in recession.

The minus 3.5 percent annual growth rate for the quarter reported on Monday was in line with gloomy forecasts for the world’s third-largest economy, which has suffered as a territorial dispute with China hammered exports already weakened by feeble global demand.

Based on the most recent data, economists are forecasting a further decline in October to December, which would officially put Japan in recession, marked by two consecutive quarterly contractions.

The government also said on Monday that consumer spending fell 0.5 percent as subsidies for auto purchases expired and corporate capital spending fell 3.2 percent. Spending on reconstruction from the country’s March 2011 disasters has also weakened.

The drop for the current quarter may not be as severe as that in July-September.

“How far is hard to tell,” said David Rea, an economist in London with Capital Economics, adding that the decline could be a couple of percentage points.

“If the economy does recover in any way it will be a minute rebound,” he said.

More than two decades after Japan’s asset bubble burst in the early 1990s, its policymakers have yet to devise an effective strategy to help the economy break out of its deflationary funk. Meanwhile, the Japanese yen remains stubbornly high, discouraging its companies from investing either at home or abroad and undermining its export competitiveness, especially against rivals Germany and South Korea.

Strangled by weak consumer spending and public investment, the economy grew at an anemic 0.7 percent annual pace in April-June, according to figures that were revised down by half from the originally reported 1.4 percent.

Until recently, the government was still forecasting growth at about 2 percent for the year. It earlier was predicting a turnaround late in the year, but the renewed tensions with China over disputed islands in the East China Sea, coupled with sluggish growth in Europe and other key export markets, have doused hopes for a significant rebound before 2013.

A slew of dismal recent data releases offers little encouragement.

Squeezed by surging costs for imported fuel and sinking exports, Japan’s current account surplus plunged to 2.72 trillion yen (US $34 billion) in April-September, its lowest level since monthly data began in 1985, as the trade deficit surged.

Although Japan will likely continue to run current account surpluses for some time to come, its decline is a stark reminder of the country’s persisting reliance on exports to support its energy-intensive standard of living through massive imports of food, fuel and other resources.

Adding to the squeeze on pocketbooks from hikes in electricity rates, winter bonuses are falling by an average of four percent this year.

Machinery orders for September fell twice as fast as expected. Meanwhile, the job market weakened, likely hurting prospects for stronger consumer spending to help offset weak exports. Slower-than-anticipated government spending on reconstruction has further undermined demand.

Japan’s local governments are running short of funds as lawmakers dicker over legislation needed to authorize bonds to pay for deficit financing.

Though the government and opposition parties look likely to reach a compromise on financing that would avert Japan’s own version of a “fiscal cliff,” the standoff has done little to inspire confidence in the potential for a strong rebound, says Klaus Baader, a regional economist with Societe Generale Cross Asset Research in Hong Kong.