Japan Says Economy Deteriorating, Signals a Recession

By Jason Clenfield

Aug. 6 (Bloomberg) -- Japan's government said the economy is ``deteriorating,'' acknowledging for the first time that the country's longest postwar expansion has probably ended.

``There is a high possibility the economy has entered a recession,'' Shigeru Sugihara, head of business statistics at the Cabinet Office said in Tokyo today. The government bases its assessment of the economy on the coincident index, its broadest indicator of economic health.

The worsening outlook may pressure Finance Minister Bunmei Ibuki and Economic and Fiscal Policy Minister Kaoru Yosano, in their jobs less than a week after a Cabinet reshuffle, to scrap a target to balance the budget by 2011 and cut the world's largest public debt.

``The recognition that a recession is possible makes it more likely that the new cabinet will weaken its stance on fiscal reform,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo.

The yen traded at 108.36 against the dollar at 4:31 p.m. in Tokyo from 108.35 before the report. The Nikkei 225 Stock Average rose 2.7 percent after crude oil prices dropped.

Japan's economy expanded at an average annualized pace of about 2.2 percent during the six years of growth that began in February 2002. During the five-year expansion that ended in 1970, the economy grew on average by 11.5 percent.

Stagflation Risk

Ibuki said yesterday the economy is at risk of falling into a state of stagflation, a combination of slowing growth and spiraling prices. Yosano said Aug. 4 he plans to announce measures this month to help consumers and companies cope with rising energy costs.

Although the economy has yet to contract for two straight quarters -- one definition of a recession -- falling exports and soaring energy and material costs have squeezed profits, compelling companies to cut production, investment and hiring.

A Toyota Motor Corp. subsidiary that builds sport-utility vehicles and Lexus sedans fired 800 workers in June and August because of falling demand for the vehicles in the U.S., the company said yesterday.

Exports fell in June for the first month in more than four years, the jobless rate rose, and factory output has fallen for two consecutive quarters.

Sony Corp.

Sony Corp. Chief Executive Officer Howard Stringer said last month the company's sales growth in the U.S. and Europe would probably slow and demand from China looked set to falter.

The coincident index, a composite of statistics including production and the ratio of jobs to applicants, fell to 101.7 in June from 103.3 a month earlier. A three-month moving-average of the index fell for a fourth month in June to 102.2 from 102.5.

The Cabinet Office declares the economy has worsened if the index has fallen for one month and the three-month moving-average has declined for three or more months.

The leading index, which signals the direction of the economy for the next three to six months, fell to 101.7 from 103.3.

Still, economists say the current slowdown is likely to be moderate relative to past recessions because companies have shed excess capacity and expanded sales in emerging markets.

Business Survey

The Bank of Japan's most recent business survey showed labor demand is close to a 16-year high. The jobs-to-applicants ratio was at 0.91 in June, meaning almost every person who wants a job can get one. During the previous recession in 2001, there were two applicants competing for every position.

``The economy is still in relatively good shape compared to similar points in previous downturns,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``If there is a recession, we expect it to be relatively shallow and short-lived.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net