Japan on Brink of Recession as Economy Shrinks

GDP shrank by 0.6%

Japan said on August 13 its economy contracted in the second quarter as falling exports and weak consumer spending sent Asia's largest economy hurtling toward its first recession in six years. Japan's gross domestic product (GDP) shrank by 0.6% in the three months to June from the previous quarter, the Cabinet Office said, marking the first time in a year that the world's second-biggest economy has contracted.

The economy shrank by 2.4% on an annualized basis, matching market expectations.

The slump put Japan on the cusp of outright recession, which is usually defined as two or more straight quarters of economic contraction. The last time that happened in Japan was in 2001, when the recession lasted for three quarters.

Economic growth "will remain very weak throughout this fiscal year," said Mamoru Yamazaki, chief economist for Japan at RBS Securities. "The increase in oil and commodity prices is damaging corporate profits, while rising inflation is hurting households," he said.

Last week the government effectively declared an end to the country's longest period of economic expansion in postwar times. Even so, the economy is considered to be in much better shape than it was during previous downturns, particularly the corporate sector which has benefitted from several years of bumper earnings. "The fundamentals of the economy are much better than in the previous post-bubble cycles," Lehman Brothers chief Japan economist Kenichi Kawasaki said. "The downside risks remain elevated, but we expect that this cyclical downturn will be a relatively mild one."

Japan is not the only major industrialized nation to have suffered an economic contraction this year -- Canada's economy shrank in the first quarter and Italy suffered negative growth in the second quarter. The U.S. economy also shrank slightly in the fourth quarter last year but has since been bolstered by stimulus measures.

While Japan's contraction was partly a hangover from the robust first-quarter growth, the slowing global economy took a heavy toll on exports, which tumbled 2.3%. Business investment was another weak spot, dropping 0.2% as cautious companies spent less on new equipment and factories.

Reflecting a slowing global economy, Japan's current account surplus plunged 67.4% in June from a year earlier to 493.9 billion yen (US$4.5 billion) as exports to the U.S. and Europe fell, official data showed August 12. The trade surplus alone tumbled 81.3% to 252.1 billion yen.

Copyright Agence France-Presse, 2008

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