Japan May Be First to Recover From Slump, Aide Says

By Toru Fujioka and Tatsuo Ito

Jan. 14 (Bloomberg) -- Japan’s economy may be the first among the Group of Seven nations to recover because its banks and companies are relatively healthy, an economic policy aide at the Cabinet Office said.

“It’s possible Japan will be the first one to see signs of recovery,” Takashi Omori, an adviser to Economic and Fiscal Policy Minister Kaoru Yosano, said in an interview on Jan. 9. “Damage in the financial sector has been relatively light and corporate health has dramatically improved.”

Japanese banks are still lending even as the global credit crunch intensifies, setting them apart from counterparts in the U.S. and Europe. While the world’s second-largest economy has become more resilient to global shocks after recovering from its own financial crisis a decade ago, the recession will linger through most of 2009, Omori said.

“At the earliest, we will see a sign of recovery in the second half of this year,” said Omori, 57, a former economist at UBS AG in Tokyo. “We still need to watch downside risks.”

Lending by Japan’s banks accelerated at the fastest pace in 16 years in December and the government has avoided buying stakes in the nation’s lenders even as the deepening global crisis forces policy makers in the U.S. and Europe to rescue financial companies.

Some economists aren’t as optimistic. A record drop in exports in November prompted the sharpest cuts in output in 55 years and companies from Toyota Motor Corp. to Sony Corp. are firing workers, damping prospects for a recovery.

‘More Severe’

“While this recession was expected to be mild, we’re finding that it’s actually much more severe than expected,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “We’re probably going to see a double- digit contraction in fourth quarter gross domestic product.”

Economists at Barclays Capital forecast Japan’s economy contracted an annualized 12.1 percent last quarter, which would be the sharpest drop since 1974. The U.S. economy shrank an annual 6.5 percent in the period, according to a Bloomberg survey of economists.

Omori, who also became the head of the Asia-Pacific Economic Cooperation economic council this month, said demand for Japan’s fuel-efficient technologies may spur growth.

Mitsubishi Motors Corp. last week said it may supply PSA Peugeot Citroen with electric cars. The Nikkei newspaper reported production would likely double to 10,000 vehicles for Peugeot from 2011 as a result.

Protectionism

Omori said one of his biggest challenges as the chairman of the APEC economic council will be preventing the spread of protectionism among APEC’s 21 member countries.

Russia last month increased duties on automobile imports, China reintroduced tax breaks for exporters, and India imposed caps on steel imports. France pledged $7.6 billion to shield its companies from foreign businesses.

“Free trade is fundamental,” said Omori, who has spent more than 32 years at the Cabinet Office. “If protectionism spreads around the world, the deterioration of the global economy will reach another level.”

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net