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Japan falls into its first recession in seven years

Japan has slipped into recession for the first time in seven years as the global financial crisis mauls its export-dependent economy, official data showed yesterday.

Japan joins Germany and Italy on the list of major economies that are now officially in recession, despite emergency steps by world powers to try to stem months of turmoil on financial markets.

“This is not going to be a short or painless recession,” warned Noriko Hama, a professor and economist at Doshisha University.

“When financial crises of this magnitude occur, as a rule of thumb we generally have a 10-year recession. We had that in the 1990s in Japan,” she said.

Japan’s economy, the second largest in the world, unexpectedly contracted 0.1 percent in the third quarter — 0.4 percent on an annualized basis — after shrinking 0.9 percent in the second, the Cabinet Office said.

The data “showed that the economy is in a recession phase. There is a risk it may worsen further,” said Economic and Fiscal Policy Minister Kaoru Yosano.

The last time Japan fell into recession — which is usually defined as two or more consecutive quarters of economic contraction — was in 2001 after the Internet bubble burst.

The latest recession began even before the Tokyo Nikkei stock index sank to a 26-year low last month, dealing a heavy blow to consumer and business confidence.

Business investment slumped 1.7 percent in the third quarter while exports were worse than expected as the financial crisis triggered by a US housing slump squeezed other major economies.

“Japan was dragged down by the weakness in the global economy,” said Kyohei Morita, chief Japan economist at Barclays Capital, who expects the recession to last for four quarters.

Although Japan has not suffered financial turmoil on the same scale as the US or Europe, its trade-dependent economy remains highly vulnerable to global downturns.

“Japan is as export-driven as ever. So as long as exports are slowing due to the weakness of the global economy, we cannot escape,” Morita said.

After suffering a series of on-off recessions in the 1990s, Japan had been slowly recovering on the back of brisk exports and business investment.

Corporate profits, however, are now sliding as exports suffer from the global slowdown and a stronger yen, prompting companies to slash investment in new equipment and factories, which had been a key driver of economic growth.

“Companies have repeatedly frozen or shelved capital expenditure plans given negative feedback from the overseas financial markets,” Morgan Stanley economist Takehiro Sato said.

He expects Japan’s economy to shrink 1.1 percent next year and believes interest rates will be cut back to zero next year as the recession drags on.

Consumer spending rose 0.3 percent in the third quarter helped by a hot summer and demand for TVs ahead of the Beijing Olympics.

But analysts said Japanese consumers are likely to tighten the purse strings as the economy worsens and companies shed workers.

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