By Jason Clenfield
Nov. 17 (Bloomberg) -- Japan's economy, the world's second largest, unexpectedly shrank in the third quarter, confirming it entered the first recession since 2001 as companies cut spending.
Gross domestic product fell an annualized 0.4 percent in the three months ended Sept. 30, the Cabinet Office said today in Tokyo. Economists predicted the economy would grow 0.1 percent after contracting a revised 3.7 percent in the previous period.
The slowdown that last month forced Prime Minister Taro Aso to propose a stimulus package is likely to worsen as export demand weakens and companies respond with investment cuts and layoffs. Toyota Motor Corp. and Canon Inc. slashed profit forecasts in the past month as U.S. consumers spend less and the yen's rise against the dollar erodes the value of sales.
``It's only going to get worse,'' said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. ``Japan may be entering its deepest recession in a decade as the global financial crisis cools demand overseas.''
The yen traded at 96.24 per dollar as of 9:46 a.m. in Tokyo from 96.09 before the report was released.
The economy last contracted over two consecutive quarters -- the technical definition of a recession -- in 2001. Reports last week showed Europe and Germany are also in recessions.
Leaders from the Group of 20 nations this weekend agreed to take a ``broader policy response'' by using interest-rate cuts and fiscal stimulus to shore up the weakening global economy.
Companies Cut Back
Quarter-on-quarter, Japan's economy shrank 0.1 percent, today's report showed. Capital spending fell 1.7 percent from the previous three months, compared with economists' expectations of a 2 percent drop.
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 fire 3,000 workers by March, and the Nikkei newspaper reported this month that it will delay adding capacity at a domestic plant that makes Lexus sedans.
``The economy is still so sensitive to the global business cycle. That's the problem,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo. ``A long as the global economy keeps sinking, Japan will probably experience a deep recession.''
Net exports subtracted 0.2 percentage point from growth after imports outweighed an increase in shipments abroad. Exports rose 0.7 percent, less than the 1.2 percent expected. Imports climbed 1.9 percent as oil surged to a record in the quarter. Economists predicted a 1.5 percent gain.
Bank of Japan
The Bank of Japan last month cut its key interest rate to 0.3 percent, the first reduction in seven years. Governor Masaaki Shirakawa and his colleagues said the global downturn and the yen's 10 percent advance against the dollar since September have created a ``severe'' earnings environment for Japanese companies.
Still, Japan will probably suffer less than its biggest counterparts after companies shed debt and streamlined labor forces following the bursting of the property and asset bubble in the early 1990s. Asia's biggest economy will shrink 0.1 percent next year, according to the Organization for Economic Cooperation and Development, less than the 0.9 percent and 0.5 percent contractions in the U.S. and Europe.
Consumers are getting some relief as inflation abates and Prime Minister Aso prepares to provide households with at least 12,000 yen ($125) each as part of a 5 trillion yen stimulus plan. Consumer spending increased 0.3 percent last quarter, more than the 0.1 percent economists expected, today's report showed.
Not a Good Sign
``Though consumer spending was a positive figure, it's difficult to take it as a good sign because the figure was boosted by seasonal factors such as the hot summer and the Olympics,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``Consumption will probably turn negative in the fourth quarter.''
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 last week.
The GDP deflator, a broad measure of price changes, fell 1.6 percent from the same period a year earlier, today's report showed, compared with economists' expectations for a 1.7 percent drop. The deflator fell 1.4 percent in the previous quarter.
To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net
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