Japan’s Recession May Deepen After Exports Drop Record 45.7%

By Timothy R. Homan and Jason Clenfield

Feb. 26 (Bloomberg) -- Japan faces its worst postwar recession as the collapse in consumer spending abroad pummels the country’s exports.

Shipments from Asia’s largest economy will contract further this year, analysts predict, after plunging a record 45.7 percent in January from a year earlier. Last month’s slide, reported yesterday by the Finance Ministry in Tokyo, pushed the trade deficit to a record 952.6 billion yen ($9.9 billion). Sales to the U.S. alone fell 52.9 percent.

“We’re set up for a very, very deep contraction in first- quarter exports,” said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. “There’s no way you’re going to reverse this situation. The quarter’s pretty much already written as of January.”

Gross domestic product shrank at an annual pace of 12.7 percent last quarter and won’t do any better in the first three months of this year, Hensley estimates. The slump could force Prime Minister Taro Aso’s government, whose popularity has dwindled to less than 10 percent, to push for more fiscal stimulus. Meantime, factories are closing and workers are losing their jobs.

Japan became more reliant on exports for growth in the past decade, making the economy more vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent in 1998, according to the central bank.

Factory Losses

Companies cut output by an unprecedented 9.8 percent in December from a month earlier and the jobless rate climbed the most in 41 years to 4.4 percent. Economists predict a report tomorrow will show factory output dropped 10 percent in January.

Nissan Motor Co. said this month it will fire 20,000 workers and post its first loss in nine years as global car demand plunges. Toyota Motor Corp., forecasting its first operating loss in seven decades, will halve production in the current quarter versus the same period last year.

“Japan is in a serious slump right now, and it’s hard to see them stimulating themselves out of this recession,’’ said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. He projects exports will contract through the third quarter, with at least a 10 percent decline in the first three months of the year.

Consumers in the U.S. are cutting back on purchases as job losses mount. Spending will contract during the first half of this year after dropping during the last six months of 2008, according to a survey of economists this month by Bloomberg News. Confidence among consumers plunged to a record low in February, the New York-based Conference Board said this week.

Record Slump Forecast

The Japanese economy’s contraction last quarter was the worst since the 1974 oil shock, and analysts predict the slump will drag into next fiscal year. Output may shrink a record 4 percent in the year starting April 1, according to economists surveyed.

Japan’s shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent. Imports fell 31.7 percent from a year earlier.

“Japan remains an economy that is very dependent on trade,” said Lewis Alexander, chief economist at Citigroup Inc. in New York. “The pace of the contraction of global trade is very extreme.”

Currency Impact

The yen’s 23 percent gain against the dollar in 2008 eroded the value of exporters’ overseas sales, exacerbating losses at Nissan and Toyota. Still, the Japanese currency has weakened 7.1 percent this month against the dollar, offering some relief to exporters while indicating investors’ growing pessimism about the economic outlook.

Bank of Japan Governor Masaaki Shirakawa said last week that the economy will remain in a “severe” state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to stem the credit squeeze.

The government has been unable to pass a stimulus package that could help encourage domestic spending in the absence of export demand. Aso is struggling to get approval from the opposition-controlled upper house to spend 10 trillion yen to aid companies and households, whose sentiment is near a record low.

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net