News Room - Business/Economics

Posted on 09 Dec 2008

Japan's recession worse than expected

Japan sank much deeper into recession than previously thought in the third quarter as firms slashed investment to cope with the financial crisis, official figures showed Tuesday.

 

The gloomy snapshot of Asia's largest economy raised fears that the downturn will be deeper and longer than previously expected, which analysts said could prompt the central bank to cut interest rates again to almost zero.

 

Japan's economy shrank 0.5 per cent in the three months to September - 1.8 per cent on an annualised basis - entering its first recession in seven years with a second straight quarter of negative growth, the government said.

 

An initial estimate last month had shown the Japanese economy shrank 0.1 per cent in the third quarter, and 0.4 per cent on an annualised basis.

 

"The data suggests that the economy is contracting faster than previously thought, and the depth of the recession will be more severe," said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong.

 

"We still haven't really seen the damage to the economy in the fourth quarter. Japan is coming from a much weaker footing than previously thought," he said, predicting the recession will last until mid-2009.

 

Weak business investment was the main culprit for the revision as companies slashed investment in new equipment and factories by 2.0 per cent, compared with an initial estimate of 1.7 per cent.

 

Japan's export-dependent economy was also hit by sluggish exports as the global financial crisis hit international trade.

 

The latest snapshot of the Japanese economy was even worse than analyst forecasts for a contraction of about 0.2 per cent quarter-on-quarter.

 

The government said the economy shrank a revised 1.0 per cent in the second quarter, which was also slightly worse than previously thought.

 

Japan has relied on brisk exports of cars, electronics and other goods to drive its recovery from recession in the 1990s.

 

But it has seen exports weaken in recent months due to worsening demand in recession-hit overseas economies.

 

"Companies are facing a profit squeeze and there is pessimism about future demand so they will have to cut business investment in the coming quarters," said Tomoko Fujii, head of economics and strategy at Bank of America.

 

The grim figures raised expectations that Japan's central bank may reduce borrowing costs again to spur economic growth.

 

The Bank of Japan in October cut interest rates for the first time in seven years, by 20 basis points to 0.3 per cent, as part of efforts to calm volatile markets and boost the recession-hit economy.

 

Japan's central bank is likely to cut interest rates again, probably in February by 20 basis points to just 0.1 per cent, Fujii predicted.