Japan Economy Shrank at 12.1% Pace Last Quarter on Export Slide

By Jason Clenfield

March 12 (Bloomberg) -- Japan’s economy contracted at the fastest pace since 1974 last quarter as exports, output and business spending collapsed.

Gross domestic product shrank an annualized 12.1 percent in the three months ended Dec. 31, less than the 12.7 percent reported last month, the Cabinet Office said today in Tokyo. The median estimate of economists was for a 13.4 percent decline.

Factory output and overseas shipments plunged by records in January and Toyota Motor Corp., Japan’s biggest automaker, will cut production by more than half this quarter. Real-estate company Pacific Holdings Co. filed for bankruptcy this week, becoming the 12th publicly traded firm to fail this year.

“Japan’s economy is falling off a cliff,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo, who correctly forecast the size of the contraction. “The revision to GDP doesn’t change our basic assessment.”

The Nikkei 225 Stock Average fell 2.4 percent, paring yesterday’s 4.6 percent gain, while the broader Topix index tumbled to a 25-year low. The yen traded at 96.46 against the dollar at 3:08 p.m. in Tokyo compared with 97.41 before the report was published.

The economy contracted 3.2 percent from the third quarter, compared with the initial estimate of a 3.3 percent drop. The revision reflected a higher-than-expected gain in inventories, which added 0.5 percentage point to GDP compared with the initial estimate of a 0.4 point contribution.

Company Losses

Companies including Toyota and Sharp Corp. are forecasting their first losses in decades. Nissan Motor Corp. said last month it plans to eliminate 20,000 jobs.

First-quarter GDP will be “severe,” Finance Minister Kaoru Yosano said in parliament today. “I’m concerned that a steep decline in production will lead to a significant adjustment in the labor force,” he said.

Political gridlock has slowed Prime Minister Taro Aso’s efforts to stimulate spending, pushing his approval rating close to 10 percent ahead of elections that must be called by September. Parliament last week passed bills authorizing cash payments of at least 12,000 yen ($122) to consumers, four months after Aso pledged the money. Lawmakers are calling for more fiscal stimulus as the slump deepens.

“In the face of this unprecedented crisis, bolder economic stimulus measures should be undertaken as soon as possible,” a ruling Liberal Democratic Party group headed by lawmaker Kotaro Tamura said yesterday.

Credit Crunch

Policy makers are also trying to counter a credit crunch that has made it more costly to borrow and caused corporate bankruptcies to rise for the past nine months.

The Financial Services Agency said this week it will start to audit banks next month to make sure they lend. The government is offering to help buy stock holdings from banks and to acquire stakes in lenders to aid loan growth. It’s also channeling funds to state-run lenders to aid companies.

“Not just automakers, but electrical and chip companies, and also other manufacturers, are coming to us in large numbers,” Hiroshi Watanabe, chief executive officer of the Japan Bank for International Cooperation, said in a March 10 interview. As part of a government program, the Tokyo-based bank is lending to “essentially blue-chip firms that are having trouble with cash flow,” he said.

Emergency Loans

JBIC has received requests for emergency loans totaling as much as $40 billion since the end of 2008, almost four times its original budget for the year that ends March 31, Watanabe said. Meanwhile, the Bank of Japan has lowered its key interest rate to 0.1 percent and is buying commercial paper and corporate bonds from banks to unclog debt markets.

Meanwhile, there are signs that companies are getting rid of inventories they built up last quarter. Nissan plans to raise domestic production this month and Toyota said it will increase manufacturing in May as it unveils new models.

“The implication is that production and export cuts of this scale should burn through inventories reasonably quickly and allow a pickup in the second quarter -- albeit still at much lower levels than a year ago,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo.

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