Quake Pushs Japan Into Recession

Japan Falls Into Recession After Economy Shrinks 3.7%

BLOOMBERG   Keiko Ujikane  Thursday May 19, 2011

Japan’s economy shrank more than estimated in the first quarter after the March 11 earthquake and tsunami disrupted production and prompted consumers to cut back spending, sending the nation to its third recession in a decade.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, following a revised 3 percent drop in the previous quarter, the Cabinet Office said today in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 1.9 percent drop.

The March disaster hit an economy already weighed down by years of deflation and subdued consumer spending, and slashed profits at companies including Toyota Motor Corp. as factories were shut. The economy, now the smallest size since 1991 unadjusted for price changes, may shrink further this quarter before rebounding later in 2011 as reconstruction kicks in.

“The contraction in the second quarter will probably be even bigger as consumer spending and exports slump,” said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. “The economy will likely return to growth from the third quarter once the supply-chain disruption eases and reconstruction work begins.”

The Nikkei 225 (NKY) Stock Average fell 0.4 percent today on the worse-than-expected GDP data. The Nikkei has lost 8 percent since the quake and tsunami, which left more than 24,000 dead or missing. The yen traded at 81.70 against the dollar at 3:48 p.m. in Tokyo, compared with 81.69 before the report was published.

‘Temporary Phenomenon’

The economic contraction may only be a “temporary phenomenon,” and two straight quarters of shrinkage “doesn’t necessarily mean the economy’s trajectory has changed,” Kaoru Yosano, the economy minister, told reporters today.

Economists typically define a recession as two consecutive quarters of contraction. The Japanese government instead determines recessions by having a committee of academics decide when recoveries and retreats begin and end.

The revised fourth quarter GDP figure showing a 3 percent annualized contraction was more than double the previous estimate, after the government revised data going back to 1980, according to the Cabinet Office.

Capital investment dropped 0.9 percent in the first quarter, the first decline in six quarters, today’s data showed.

‘Shocking’ Data

“It’s hard to think that companies will become aggressive about increasing business spending when uncertainties remain strong,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

Consumer spending fell 0.6 percent in the January-March period from the previous three months, the second straight quarter of declines, today’s report showed. In a sign that customers are returning to shops, nationwide department store sales fell 1.5 percent in April, easing from March’s 14.7 percent decline, a report today showed.

From the previous quarter, the economy shrank 0.9 percent in the first three months of 2011, today’s report showed. In nominal terms, the economy contracted an annualized 5.2 percent in the first quarter, the most since the first quarter of 2009, today’s report showed.

Net exports, or shipments less imports, subtracted 0.2 percentage point from GDP.

The GDP figures today were “shocking,” Toshiro Muto, a former deputy governor of the Bank of Japan, said today in Tokyo. While the economy may resume growth in the fourth quarter, for the fiscal year ending March 2012 as a whole it may shrink by 0.4 percent to 0.5 percent, said Muto, now the head of Daiwa Institute of Research.

Shrinking Economy

The economy will probably contract at a 3.3 percent annual pace this quarter, and then resume growth the next two quarters, according to the average forecast of 43 economists in a survey by the government-affiliated Economic Planning Association released on May 16.

Japan’s GDP shrank for four straight quarters during the global financial crisis, and contracted for three straight quarters in 2001. Consumer prices excluding fresh food costs have dropped every month since March 2009, underscoring the deflationary pressure that has sapped consumer demand.

The GDP deflator, a gauge of price trends, fell 1.9 percent in the first quarter from a year earlier, today’s report showed.

Highlighting the disaster’s effect on companies, Toyota Motor, the world’s largest carmaker, said last week that profit slumped 77 percent to the lowest in 1 1/2 years for the three months ended March 31. The earthquake forced it to halt production and depressed its domestic sales.

Kan Stimulus

Nippon Steel Corp., Japan’s biggest steelmaker, said in April it posted a worse-than-expected loss in the fiscal fourth- quarter after the temblor damaged plants. The company’s output is expected to drop by 7 percent to 8 percent this quarter as damaged carmaker facilities damp orders.

Prime Minister Naoto Kan plans to come up with second extra budget for reconstruction after parliament approved a 4 trillion yen ($49 billion) budget this month. He will need the cooperation of opposition party politicians, who control the Upper House of parliament, to get the second budget enacted. The government in March estimated that damage from the disaster will swell to as high as 25 trillion yen.

Japan’s central bank injected record amounts of cash into the money market after the quake, and doubled to 10 trillion yen a fund to buy assets such as corporate bonds and real estate investment trusts. The Bank of Japan’s policy board last month rejected a proposal by a deputy governor to expand that fund.

V-Shaped Recovery

Some data suggest that demand may recover earlier than expected after the quake.

Machinery orders, an indicator of future capital spending, unexpectedly increased in March, while companies said they plan to increase factory output in April and May.

Honda Motor Co., Japan’s third-largest automaker, said this week it will return to normal production before the end of the year as its production has recovered faster than it expected. Toyota Motor and Nissan Motor Co. have also said the recovery in production is quicker than expected.

“We look for a classic V-shaped recovery in the July-to- September period and after,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “A self-sustaining recovery in production, an increase in government consumption and reconstruction demand centered around public works will likely support the economy.”


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