Soaring commodity prices push Japan to brink of recession

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The Independent Online

Japan's economy, the second largest in the world, is on the brink of recession, as evidence grows that the economic woes afflicting Europe and America are spreading eastwards.

Revised GDP data released yesterday showed that the Japanese economy shrank at an annualised rate of 3 per cent rate between April and June, worse than already pessimistic expectations, and its weakest performance in seven years.

The figures, released by the cabinet office in Tokyo, showed that the economy contracted by 0.7 per cent in the second quarter, as lower than estimated capital investment pushed the figure down from the previously thought 0.6 per cent second-quarter fall. The soaring price of oil and other commodities during the period hit resource-poor Japan especially badly.

In fact the sharp downturn already qualifies as a recession on the official Japanese classification, which defines recession as the point at which growth begins to slow.

Most economists believe that the economy may just struggle to zero or a small positive reading in the third quarter of this year, but many argue that, given the continuing credit crunch, global financial instability and a worsening situation in the United States and Europe, key markets for exports, the Japanese economy could contract for a second consecutive quarter, between July and September. That would then meet the customary international definition of a recession.

"We expect modest GDP growth of around 0.3 per cent in July-September," said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute. "But as a trend, the moderate recession will continue and we will probably see more weak indicators in the second half of this year."

For the first time in more than two years, faltering Japanese exports, down 2.5 per cent, contributed to negative economic growth, a worrying development given that trade has been one of the few engines of growth for Japan since the current stagnation set in almost 20 years ago. The long-term weakness of the domestic economy, after the bursting of the asset price bubbles of the 1980s, has left Japan perilously close to deflation ever since.

The response of the Japanese authorities has been to downplay comparisons between current trends and previous periods of recession. Kiyohiko Nishimura, deputy governor of the Bank of Japan, said: "The situation is different from past recessionary phases. The possibility of a sharp downturn is small." Recently the cabinet office merely talked of Japan's "deteriorating economy".

Indications of a cooling in the neighbouring Chinese economy, an increasingly important economic partner of Japan, also emerged yesterday. The factory closures ordered to ease pollution during the Beijing Olympics caused industrial output growth in August to fall to a six-month low.

Overall industrial output in China was up an impressive 12.8 per cent on the year before last month, but this was markedly lower than the 14.7 per cent it had stood at in July. However, retail sales continued to expand at near-record pace following government efforts to encourage domestic demand. Exports and capital spending also remained strong. With industrial output expected to bounce back after the Olympics, China's main worry, like Japan's, will be for the health of its export markets.