Japan Economy Headed for Longest Slump in Decade, Analysts Say

By Tatsuo Ito

Nov. 21 (Bloomberg) -- Japan's economy will probably shrink this year and next in the first back-to-back contractions since the onset of the banking crisis a decade ago, economists say.

Gross domestic product will shrink 0.45 percent in the year ending March 2009 and 0.3 percent in the following year, according to the median estimate of 16 economists surveyed by Bloomberg News. Analysts slashed their estimates after a report this week showed the economy fell into a recession last quarter.

The slump in the world's second-largest economy is intensifying this quarter as the global slowdown reduces demand for Japanese goods overseas, the main driver of the expansion that just ended. Weakening corporate profits will also weigh on wages, forcing consumers to reduce spending.

``Japan will lose its drivers of growth, with production cuts deepening, both corporate and consumer confidence worsening, and exports losing steam,'' said Hidetaka Yoneyama, a senior analyst at Fujitsu Research Institute in Tokyo.

Japan last contracted for two straight years in fiscal 1997 and 1998, when banks burdened by soured loans from the asset bubble folded. The economy shrank 0.01 percent and 1.5 percent in each of those years, according to government data.

The Bank of Japan lowered the key overnight lending rate for the first time in seven years in October as fallout the worldwide credit crunch sent the yen to a 13-year high against the dollar and the Nikkei 225 Stock Average to its lowest level since 1982. Since the rate cut, prospects for a global downturn have risen with Europe and the U.S. slipping into recession.

Prolonged Slump

Companies are bracing for a prolonged slump. Automakers Isuzu Motors Ltd. and Hino Motors Ltd. said yesterday they plan to cut output in response to weaker overseas sales. Toyota Motor Corp. and Canon Inc. slashed profit forecasts.

``We haven't even seen the negative impact of the financial crisis spread to Europe and Japan yet,'' said Ryutaro Kono, chief Japan economist at BNP Paribas Securities Ltd. in Tokyo. ``The decline in exports will lead to cuts in production and labor and will ultimately post severe limitations on personal consumption and capital spending.''

A shrinking economy will limit policy options for Prime Minister Taro Aso, who needs to call elections before September. Lower growth prospects mean the government has less revenue to spend in the 2009 budget due for release next month.

The recession may also force the government to find more ways to stimulate growth even after drafting two economic packages since August. Aso is already strained by the largest debt burden in the industrialized world, which the Organization for Economic Cooperation and Development estimates exceeds 180 percent of gross domestic product.

Before last week's GDP report, economists had expected the economy to expand 0.15 percent this year and 0.65 percent in 2009. The following table shows economists' estimates for GDP. Their predictions before the third-quarter GDP report are in parentheses.

                                        FY08          FY09
                                        %             %
Japan Research Institute            -0.5 (-0.2)   -0.2 (-0.2)
Mitsubishi Research Institute       -0.2 (0.8)    -0.2 (0.8)
NLI Research Center                 -0.4(0.6)    -0.5(1.6)
Fujitsu Research Institute          -0.4(0.7)     0.3(1.5)
Mizuho Research Institute           -0.5(0.6)    -0.9(1.0)
Dai-Ichi Life Research              -0.6(0.2)    -0.5(0.3)
Meiji Yasuda Life                   -0.4(0.1)    -0.3(0.4)
Mitsubishi UFJ Research & Cons.     -0.6(1.0)    -0.3(1.3)
Sumitomo Mitsui Asset Management    -0.3(0.1)    0.5(0.8)
Barclays Capital                    -0.5(-0.2)   -0.2(0.0)
Morgan Stanley                      -0.6(-0.3)   -0.5(-0.4)
J.P. Morgan                         -0.8(-0.7)   -1.1(-1.2)
BNP Paribas                         -0.4(-0.1)   -0.4(-0.4)
Bank of America                     -0.4(-0.2)   0.4(0.5)
Daiwa Research                      -0.5(0.4)   -1.0(1.1)
Norinchukin Research                -0.3(0.4)   -0.2(1.3)

To contact the reporter on this story: Tatsuo Ito in Tokyo at Tito2@bloomberg.net