Japan’s Economy Probably Shrank by Most Since 1974

By Jason Clenfield

Feb. 12 (Bloomberg) -- Japan’s economy shrank at an annual pace of more than 10 percent last quarter amid an unprecedented collapse in exports and production, a report next week may show.

Gross domestic product for the three months ended Dec. 31 contracted an annualized 11.7 percent, the sharpest slowdown since the 1974 oil crisis, according to the median estimate of 24 economists surveyed by Bloomberg News. The Cabinet Office will release the report on Feb. 16 at 8:50 a.m. in Tokyo.

Exports plunged a record 23.1 percent in the fourth quarter as global credit markets seized up and world growth sputtered. Toyota Motor Corp., Toshiba Corp. and Hitachi Ltd. -- all of which are forecasting losses for the current fiscal year -- have fired thousands of workers, heightening the risk a slump in household spending will prolong the recession.

“External demand has collapsed,” said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo. “The fourth and first quarters will be the worst, but even after passing through this period the economy will stay in a recession for quite a while.”

The Nikkei 225 Stock Average, which has lost 32 percent of its value since September, fell for a third day on concern that U.S. President Barack Obama’s bank-rescue plan won’t fix the financial crisis. The benchmark slumped 3.1 percent to 7,697.21 at the 12:47 p.m. in Tokyo.

Lehman’s Collapse

Japan’s economy probably shrank 3.1 percent from the third quarter in the first set of GDP data made available for the period following the collapse of Lehman Brothers Holdings Inc., economists said. That would be almost triple the pace of contractions in other major economies -- the U.S. shrank 1 percent quarter-on-quarter and a report out this week is expected to show the Euro-zone GDP fell 1.3 percent.

Lehman’s collapse triggered a credit crisis that erased more than $10 trillion from global equity markets, hobbled U.S. consumers and paralyzed global trade. The meltdown also spurred a 15 percent surge in the yen against the dollar, reducing earnings for Japanese exporters already coping with weak demand.

Net exports -- the difference between exports and imports -- accounted for 2.3 percentage points of Japan’s contraction last quarter, according to economist forecasts. Domestic demand, which includes household spending and capital investment, probably subtracted 0.9 percentage points from growth, they said.

Stimulus Spending

In contrast with the U.S. and China, where governments are moving forward with a combined $1.4 trillion in stimulus spending, policy makers in Japan are providing little help.

Parliamentary gridlock has blocked the passage of a 10 trillion yen ($111 billion) stimulus package intended to encourage consumer spending. The Bank of Japan, which in December cut its key rate to 0.1 percent and has started to purchase shares and corporate debt from banks in order to spur lending, has little means to address what analysts say is the economy’s central problem: a lack of overseas demand.

“Most of what ails the economy is something out of their control, namely that exports have gone down by a third,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Given that they can’t even agree on what color curtains to hang up in the Diet, it seems pretty unlikely they’re going to be able to agree on any meaningful policy stimulus.”

The global fallout has started to ripple through Japan’s economy as exporters from Toyota to Sony Corp. fire workers. The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades.

Firings Intensify

The firings have intensified in the last two weeks, with Nissan Motor Co., NEC Corp. and Panasonic Corp. announcing a combined 55,000 job cuts. The reductions may have pushed the recession into a “new phase” in which consumers become more defensive and spend less, according to Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo.

“You’re getting mass unemployment,” said Schulz. “It’s really scaring the households.”

Household sentiment is close to the lowest level in at least 26 years. Their spending accounts for more than half of the economy.

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