Japan's Recession May Be Shallow, Cabinet Office Economist Says

By Toru Fujioka and Tatsuo Ito

Nov. 6 (Bloomberg) -- Japan's recession will be shallower than the U.S. and Europe because damage from the global credit crisis has been limited, the Cabinet Office's top economist said.

``The depth of Japan's recession won't be as severe as those of the U.S. and Europe because of the relatively healthy financial system,'' Jun Saito, an adviser to Economic and Fiscal Policy Minister Kaoru Yosano, said in an interview yesterday in Tokyo. ``The pressure for adjustments in capacity, labor and inventory is smaller than that of previous recessions.''

Japanese banks are still lending to each other as well as to companies, setting them apart from counterparts in the U.S. and Europe. The world's second-largest economy has become more resilient to global shocks after three recessions since 1990 forced companies and banks to fire workers and clean up debt.

Japan's financial institutions recorded about $15.6 billion in subprime mortgage-related losses as of June, according to the nation's financial regulator, a fraction of the $690 billion in writedowns and credit losses suffered by financial companies around the world.

The difference between what banks and governments pay to borrow money for three months, known as the TED spread, is 40 basis points in Japan, compared with 222 basis points in the U.S. and 200 basis points in Europe.

Overhangs of capacity, labor and debt -- known as the three excesses that were a burden on the economy since the nation's asset bubble burst in the late 1980s -- have also diminished. A key central bank measure of surplus production capacity stood at 2 in September, compared with a 12-year high of 33 in March 2002.

Be Shallower

A shallower recession doesn't mean Japan will be one of the first to emerge from the downturn, said Saito, who is one of three advisors to Yosano.

``It's hard to imagine the economy will recover without a pickup in foreign demand,'' Saito said. ``The timing of Japan's turning point will depend on when the U.S. economy comes back,'' he said, adding that resilient demand from China could help the global economy. Clear signs of a recovery in Japan won't be seen until the second half of next year at the earliest, he said.

The government cut its evaluation of the economy last month, saying it has ``weakened further.'' Saito said it refrained from using the word ``recession'' because the government doesn't officially mark the business cycle. Like in the U.S., economic peaks and troughs are marked by a government-appointed committee of economists who analyze data over a longer term.

`In a Recession'

``We didn't use the word recession because we aren't the ones who decide the economic cycle,'' Saito said. ``But our understanding is that Japan is in a recession, although this isn't an official call.''

Saito said the government is paying close attention to the job market and spending by consumers, whose outlays make up more than half of the economy.

``There is a downward momentum,'' Saito said. ``Employment and consumer spending are key'' to help Japan avoid a deeper recession, he said.

Reports in the past month have also shown the number of jobs available to each applicant dropped to a four-year low and households pared spending at the fastest pace in two years amid the worst consumer sentiment on record.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Tatsuo Ito in Tokyo at Tito2@bloomberg.net