By Jason Simpkins
Associate Editor
Money Morning
Japan, the world’s second largest economy, officially entered into a recession in the third quarter, as growth shrank at an annualized rate of 0.4% after posting a second-quarter contraction of 3.7%. Japan’s downturn is worse than many economists had expected and could worsen, as consumers in the United States continue to retrench.
“Downside risks to the economy are growing further,” Kaoru Yosano, Japan’s finance minister, told reporters. “Japan is in a very serious situation.”
Japan’s domestic economy remains weak with declining wages and rising unemployment. But the greater danger is a sharp drop in exports, especially to the United States. Net exports shaved 0.2% off of growth, as imports outweighed a slight increase in overseas shipments.
Exports rose just 0.7% in the third quarter, less than the 1.2% forecast. Meanwhile, imports climbed 1.9%, as the cost of oil spiked in the July-September period.
Trade accounts for just 17% of gross domestic product (GDP), but it is the country's only true growth engine. And the United States accounts for more than 25% of Japanese exports, which leaves the economy extremely vulnerable to a U.S. slowdown.
With U.S. demand stifled by the credit crunch, declining exports are squeezing the profits of large corporations and forcing smaller companies into bankruptcy. Japanese companies cut spending on new factories and machinery by 1.7% from the previous quarter, the third consecutive quarterly decline.
Canon Inc. (CAJ), the world's largest camera maker, last month predicted profit growth would fall for the first time in nine years. The company said it would be forced to cut capital spending for the year by 4.7% to 410 billion yen as a result. Toyota Motor Corp. (TM), world’s largest carmaker, said its profit will fall by almost 70% this fiscal year, forcing the company to fire 3,000 employees by March. Toyota makes more than three-quarters of its sales abroad.
Corporate bankruptcies rose 13.4% to 1,429 in the month of October, the highest level in five years.
“We need to bear in mind that economic conditions could worsen further as the U.S. and European financial crisis deepens, worries of economic downturn heighten, and stock and foreign exchange markets make big swings,” Yosano said.
The Organization for Economic Cooperation and Development (OECD) predicts the Japanese economy will contract by 0.1% in 2009. However, the Paris-based group forecast much steeper declines for the United States and Europe.
The Eurozone – the 15 countries that use the euro – is already in recession, having contracted by 0.2% in both the second and third quarters of 2008. And the economy of the 27-nation European Union (EU) also shrank by 0.2% in the three months ended September. The U.S. economy shrank 0.3% in the third quarter and the fourth quarter is shaping up to be much worse.
The OECD forecast a 0.5% decline for EU next year, and a 0.9% decline in the United States.
“This will be a long but uncomplicated downturn for Japan,” Takahide Kiuchi, senior economist at Nomura Securities, told The International Herald Tribune. “Japan will take a hit on exports, but it has no big structural problems to fix, unlike the United States.”
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