Bloomberg News

Japan Likely Relapsed Into Contraction Last Quarter: Economy

January 06, 2012

Jan. 6 (Bloomberg) -- Japan’s rebound from the aftermath of a record earthquake was probably cut short in the fourth quarter as the impact of Europe’s crisis outweighed the support from reconstruction spending.

Gross domestic product probably shrank in October and November, pointing to a 0.1 percent contraction for the quarter, according to calculations by the Japan Center for Economic Research, an independent analysis group in Tokyo. JPMorgan Chase & Co. is among banks cutting projections for GDP in the period.

“It was a very tough quarter for the Japanese economy,” said Yuki Masujima, a senior economist at JCER who used to compile economic forecasts at the Bank of Japan. “The biggest risk this year is the double-hit from the European crisis -- first from the strong yen that will make it harder for exporters to sell their products, then from the drop in real demand.”

A third contraction in four quarters would widen Japan’s gap with China, which overtook it as the world’s second-largest economy in 2010, and undermine a global recovery clouded by Europe’s failure to contain the debt crisis. It also risks deepening public opposition to Prime Minister Yoshihiko Noda’s plan, approved by the cabinet today, to double the nation’s 5 percent sales tax by 2015. Lawmakers from the opposition, along with some ruling-party members, have said a higher levy would undermine Japan’s fight against more than a decade of deflation.

Production, Exports

Fourth-quarter GDP data are scheduled for release Feb. 13 by the Cabinet Office. Key economic indicators for December are due late this month. In November, industrial output slid 2.6 percent and exports tumbled 4.5 percent, missing economists’ forecasts and signaling weakness in an export-driven economy that’s failed to contribute to global growth.

The world’s third-largest economy shrank 0.3 percent in October and 0.5 percent in November, according to estimates made by JCER, which tracks GDP on a monthly basis. JPMorgan yesterday lowered its forecast to an annualized 0.6 percent contraction for the fourth quarter, compared with a previous estimate of 0.5 percent growth. It also said GDP will rise 1.3 percent this year, less than an earlier projection of 1.9 percent. GDP jumped at an annualized 5.6 percent in the three months through September.

Exacerbating the drop in overseas demand is a strengthening in the yen, which reached an 11-year high of 98.48 per euro yesterday and a post-war record of 75.35 per dollar on Oct. 31. Japanese authorities intervened in the foreign-exchange market at least three times last year to keep the currency’s gains from hobbling the post-disaster recovery. The yen traded at 77.19 against the dollar at 1:44 p.m. and 98.67 against the euro in Tokyo today.

‘Big Impact’

“The weakening euro has had a big impact on Japan, especially on the industries exporting to Europe,” Finance Minister Jun Azumi told reporters today in Tokyo. “I’d like this situation to be resolved as soon as possible.”

The MSCI Asia Pacific Index dropped 1.2 percent to 114.09 after a French bond auction stoked concern Europe’s debt crisis is deepening.

In Europe, reports may show consumer prices in Switzerland fell 0.1 last month from November, German factory orders sank 1.8 percent in November from a month earlier and Norway’s manufacturing production dropped 0.1 percent in November from the prior month, according to the median forecasts of economists surveyed.

Other reports may indicate consumer confidence across the euro area deteriorated in December, while region-wide retail sales may have slumped 0.4 percent in November from the prior month, according to the median estimates of economists surveyed by Bloomberg News.

U.S. Jobs

In the U.S., the Labor Department is scheduled to release its monthly employment report, which economists surveyed expect will show an increase in non-farm payrolls last month of 155,000 jobs from a 120,000 gain the previous month. The nation’s unemployment rate is forecast at 8.7 percent.

Europe’s slump is beginning to damp domestic demand in Japan, with sentiment among small merchants and consumers worsening in the most recent surveys. Private-sector economists surveyed by the Cabinet Office between Nov. 24 and Dec. 1 cut their forecasts for fourth quarter annualized growth to 0.7 percent expansion from the 2.1 percent forecast they made a month earlier.

That doesn’t bode well for Noda’s plan to raise the 5 percent sales tax to 8 percent in April 2014 and to 10 percent in October 2015. The blueprint -- based on the ruling party’s recommendations published last month -- stipulates that a variety of economic indicators should be examined before the government actually raises the levy.

JCER’s Masujima said the economy will begin to pick up “gradually” starting in this quarter as more of the 20 trillion yen ($259 billion) in reconstruction money is deployed to the disaster-stricken northeast.

“It will be a tug of war between the reconstruction demand and further drops in overseas demand,” said Masujima. “It all depends on how the situation in Europe evolves.”

--With assistance from Brendan Murray in Sydney and Toru Fujioka in Tokyo. Editors: Lily Nonomiya, Chris Anstey

To contact the reporter on this story: Aki Ito in Tokyo at

To contact the editor responsible for this story: Stephanie Phang at

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