Japan's Economy Probably Barely Grew as Exports Waned

By Jason Clenfield

Nov. 12 (Bloomberg) -- Japan's economy was probably at a standstill in the third quarter as a deepening global slowdown and weak demand at home edged the nation closer to its first recession in six years.

Gross domestic product rose an annualized 0.1 percent in the three months ended Sept. 30, economists predicted a Cabinet Office report will show Nov. 17. The world's second-largest economy contracted 3 percent in the previous quarter.

The slowdown that forced Prime Minister Taro Aso to delay elections may worsen as a global recession weakens exports, prompting companies to cut investment and hiring. Toyota Motor Corp. and Canon Inc. slashed profit forecasts in the past month as demand slows and a stronger yen erodes the value of sales.

``Marginally positive real GDP growth in the third quarter should probably be viewed as the calm before the storm,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Aso, whose approval ratings have tumbled since he took office in September, last month said the government will spend 5 trillion yen ($51 billion) to help households and small businesses weather the crisis. He indicated on Oct. 30 he would postpone the election until the global turmoil subsides.

The Bank of Japan last month cut its key interest rate to 0.3 percent, the first reduction in seven years. It said the global slowdown and the yen's advance against the dollar have created a ``severe'' earnings environment for Japanese companies.

Stock-Market Rout

The Nikkei 225 Stock Average plunged to a 26-year low last month and has lost 43 percent this year. It slid 0.3 percent as of the lunch break in Tokyo. The yen, which climbed to a 13-year high of 90.93 against the dollar on Oct. 24, traded at 97.78.

The International Monetary Fund last week cut its world growth forecast to 2.2 percent, below the 3 percent that it says is the equivalent to a global recession. The fund expects that the U.S., Europe and Japan will shrink next year, the first simultaneous contraction since World War II.

``We don't expect the economy to return to trend growth until the global economy shows positive signs of recovery -- no way,'' said Akira Maekawa, a senior economist at UBS AG in Tokyo. ``Until the global economy recovers Japan will have to deal with very slow, even though positive, growth rates.''

Net exports -- the difference between exports and imports - - probably failed to contribute to growth for a second quarter, robbing Japan of the engine that drove the nation's recovery from the 2001 recession, economist surveyed said.

Toyota Cuts

Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The carmaker will delay adding production capacity at a domestic plant that makes Lexus models, the Nikkei newspaper reported yesterday. The company will also lay off 3,000 workers by the end of March.

The ratio of jobs to applicants has fallen for eight months and the deteriorating profit outlook for companies is also putting pressure on wages. Winter bonuses, which typically account for about 10 percent of a fulltime worker's annual pay, will fall 2.9 percent this year, the Nikkei reported this week.

``You don't get a feel-good factor from that,'' said Jesper Koll, chief executive office at Tokyo-based hedge fund TRJ Tantallon Research Japan. Koll said he expects Japanese consumers, whose sentiment is already near the lowest level in more than 20 years, will become more frugal in coming months.

Domestic demand, which includes private consumption, business spending and housing investment, was probably flat for the quarter, economists predicted. A 2 percent drop in business spending canceled out a 3.6 percent increase in housing investment and a 0.1 percent gain in consumer spending.

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