Nov 8, 2012

Japan - Japan's economy likely in recession

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The composite index of coincident economic indicators for September dropped for the sixth straight month, indicating Japan's economy has likely entered a recession, according to the Cabinet Office.

The coincident CI, which reflects current economic conditions, stood at 91.2 compared with 100 for the base year of 2005, down 2.3 points from the previous month, the office said in a preliminary report released Tuesday.

In addition to declining exports stemming from a slowdown in overseas economies, some indicators, such as industrial output and shipments of durable goods, dropped due to sluggish domestic auto sales following the end of a government subsidy program for purchases of environmentally friendly vehicles.

The Cabinet Office revised downward its basic assessment, saying the national economy has moved into a recessionary phase and is likely in the first stages of an economic slowdown.

This was the first such assessment made since May 2011, just after the Great East Japan Earthquake and tsunami.

Concerning future prospects, the Cabinet Office said it will be necessary to keep a close eye on the global economic downturn and exports.

Some market observers suspect the domestic economy entered a recessionary phase after peaking in March.

Sluggish exports cast dark clouds

The government will need to closely analyse various data before officially stating the economy has entered a recession. However, dark clouds are looming.

"It's fairly difficult to judge whether the country has moved into an economic slump as we have to comprehensively consider various indicators," said Seiji Maehara, state minister for economic and fiscal policy.

The economy had been expanding since bottoming out in March 2009.

However, to some economists, there is no question that the economy is in trouble.

"The current economic situation is clearly getting worse, it's not simply stagnant," said Yoshiki Shinke, a senior economist at the Dai-Ichi Life Research Institute. "I suspect the national economy peaked in March this year."

This is the first time the CI has dropped for six straight months since a 10-month period of decline from June 2008 to March 2009, which included the so-called Lehman Shock in September 2008.

Declining exports caused by the global economic slowdown, sluggish domestic auto sales and the detrimental effects of soured relations with China over the Senkaku Islands have aggravated the situation.

The government on Monday will issue a preliminary report on the nation's seasonally adjusted real gross domestic product for the July-September period, in which negative growth estimates are expected for the first time in the last five quarters. Furthermore, some observers believe negative GDP growth will continue into the next October-December quarter.

The government has not abandoned hope that the economy will recover if overseas economies improve along with the beneficial effects of increased demand for reconstruction in areas hit by the March 2011 disaster.

"There are signs the Chinese economy has bottomed out, so the Japanese economy is expected to recover in a relatively short time," said Yoko Takeda, senior economist at the Mitsubishi Research Institute, Inc.

However, the leading index--a yardstick for economic performance in the months ahead--was down 1.5 points at 91.7, the first drop in two months.

If exports continue to lag for reasons such as ongoing tensions with China, it will cause further production declines, which could have an adverse impact on employment. -- Hiroyuki Kato

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