Japan Economy Goes From Best to Worst on Export Slump, Yen Gain

By Jason Clenfield

Feb. 17 (Bloomberg) -- Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has become the worst.

Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.

The credit crisis that crippled the U.S. financial system may have also knocked out the props that supported Japanese growth between 2002 and 2007: a U.S. consumer-spending bubble and a cheap yen. The speed of the deterioration has taken companies by surprise: Toyota Motor Corp. this month forecast a 450 billion yen ($4.9 billion) loss, reversing a November estimate it would make 550 billion yen.

“We thought this would be a cyclical slowdown for the Japanese economy,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “It’s now clearly a structural one. Eventually we should see some stabilization in consumption globally, but there just won’t be the same” willingness to fund spending by taking on debt, he said.

The International Monetary Fund last month forecast Japan’s economy would shrink 2.6 percent in 2009, versus contractions of 1.6 percent and 2 percent in the U.S. and Europe. In November, the fund predicted Japan would outpace its rivals.

Since then, industrial production plunged at the steepest pace in 55 years in the fourth quarter, and unemployment rose at the fastest rate in 41 years in December. Panasonic Corp., Pioneer Corp., Nissan Motor Co. and NEC Corp. announced a combined 65,000 job cuts in the past month.

‘Devastating Effects’

The end of easy credit in the U.S. will lead to a “quantum downward shift” in consumer spending in the world’s largest economy that may have long-term and devastating effects on economies that have relied on it, according to Allen Sinai, chief global economist at Decision Economics Inc. in New York. Exporters Toyota and Canon Inc. get more than a third of their sales in North America.

“Companies that planned their businesses around the idea that U.S. consumer spending would grow by 3 percent per year, as it has for decades, are in for a shock,” said Sinai, who spoke in an interview in Tokyo after he briefed Japan’s biggest business lobby, Keidanren, on the U.S. outlook.

Investment in production capacity in the six years through 2007, when Japan enjoyed its longest post-World War II period of growth, may have saddled manufacturers with factories and workers they no longer need. Toyota, which has forecast its first loss in seven decades, will slash domestic production by half this quarter.

Excess Capacity

“Manufacturers have been left with big structural excesses in capacity that need to be worked out,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “It’ll take years.”

The second blight on the economy is the surge in the yen. Japan’s currency has traded at an average of about 90 per dollar so far this quarter, up 22 percent from the average of about 115 during the six-year expansion that ended in 2007.

The yen jumped as investors reduced so-called carry trades, where they borrowed in the currency to invest in nations where interest rates exceeded Japan’s, which have been at or below 0.5 percent since 1995.

“Where Japan stands out is the fact that we’ve got the hot currency,” said Jesper Koll, Tokyo-based chief executive officer at hedge fund TRJ Tantallon Research Japan. “Where I’m different from Germany, from Korea, from China, from America is my currency, the yen, has appreciated against everything in the universe.”

‘Weak Yen Bubble’

The bursting of what Eisuke Sakakibara, former top currency official at the Ministry of Finance calls a “weak yen bubble” could make it unprofitable for many manufacturers to keep making cars and electronics at home. Toshiba Corp., which is forecasting a record $3.1 billion loss, says it will postpone building two domestic chip factories. The company may send some production to Southeast Asia to cut costs, according to the Asahi Newspaper.

“The very sharp adjustment of the yen toward fair value has made as lot of the capacity that has been put in place over the recovery simply redundant,” said Maguire at Societe Generale. “A lot of the production that’s occurring in Japan is just no longer economically viable.”

To be sure, decisions by companies to cut production and sack workers may mean they will be in better shape once demand recovers, according to Tetsuro Sugiura, chief economist at Mizuho Research Institute in Tokyo.

During the so-called lost decade that followed the bursting of Japan’s stock and property bubbles in the early 1990s, companies were slow to cut production and sack workers.

“The situation isn’t as bad as it looks,” said Sugiura. “Companies are saying that, while the downturn is severe, they can survive. They’re adjusting very, very quickly.”

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