Nov 16, 2014 7:43 PM

Japan in recession as economy contracts 1.6 pct

The Associated Press

TOKYO (AP) Japan's economy contracted in July-September according to preliminary data released Monday, returning the country to recession and clouding the outlook for the global recovery.

The 1.6 percent drop in annual growth for the world's third-biggest economy was much lower than expected. It raises the likelihood that Prime Minister Shinzo Abe will delay implementation of a sales tax hike planned for October 2015.

That will slow progress on Japan's effort to bring its government debt, the largest among industrial nations, under control a commitment Abe made when he took office in December 2012, vowing to restore Japan's economic vigor after two decades of doldrums.

Abe was due back later Monday from the Group of 20 summit in Brisbane, Australia, where he and other leaders pledged to jolt the lethargic world economy back to life and boost global GDP by more than $2 trillion over five years.

Japan is struggling to regain momentum as its population declines and ages. Apart from its automakers, many of its manufacturers have lost their leading edge in innovation, while shifting production offshore. Japanese household incomes peaked more than a decade ago, and a growing share of workers struggle to make ends meet on part-time, contract work.

Most economists had forecast that the world's third-biggest economy would expand at about a 2 percent pace and the contraction in July-September took most analysts by surprise.

A recession commonly is regarded as two straight quarters of economic contraction, and the decline in July-September represented a 0.4 percent decrease from the previous quarter. The economy contracted 7.1 percent in April-June after the national sales tax was raised to 8 percent from 5 percent.

"The important thing is domestic demand has been really weaker than expected," said Junko Nishioka, an economist at RBS Japan Securities. "The impact of the sales tax was much more severe than expected."

Japan emerged from its last recession in late 2012, and saw relatively strong growth in 2013, as share prices rose and exporters like Toyota Motor Corp. logged a windfall from a sharp decline in the value of the Japanese yen.

Meanwhile, household spending has remained lackluster, as families and small companies tightened belts to meet higher costs while wage increases mostly limited to a small share of workers in big-name companies lagged behind inflation.

Abe is expected to make the dismal GDP reading the basis for calling a general election to underpin the public mandate for his "Abenomics" policies of lax monetary policy, fiscal spending and structural economic reforms.

"In light of the sharp fall in today's preliminary estimate, it now looks likely that (Prime Minister) Abe will call off the hike and announce snap elections," economist Marcel Thieliant of Capital Economics said in a commentary.

Tax increases are crucial for getting Japan's battered government finances into better shape, and putting off the hike slated for next year carries some risk that financial markets may doubt Japan's resolve to restore its ailing public finances. After many years of deficit spending the total public debt is more than twice the size of the economy and the largest among developed nations.

But Abe and his advisers appear to view the threat to Japan's recovery, which has limped along since the April 1 increase in the sales tax, as the more urgent risk.

In early 2013, Abe and Bank of Japan Gov. Haruhiko Kuroda united in seeking to end the long spell of deflation that they say is discouraging companies and consumers from spending money.

So far, price increases have fallen short of their inflation target of 2 percent, with most of the increases coming from the sales tax hike and from higher costs for imports due to extreme monetary that has helped drive the value of the Japanese yen to seven-year lows against the U.S. dollar.

On Dec. 31, Kuroda announced the central bank would step up its asset purchases, accelerating Japan's "quantitative easing" just as the U.S. was ending its own asset purchases. Despite that surprise move, Kuroda has insisted that the economy is still in the midst of a "moderate recovery."

The BOJ's move, along with a government decision to shift a large share of the public pension fund investments out of government bonds and into higher yielding but riskier shares, pushed Japan's share benchmark to seven-year highs this month.

As of late morning, the Nikkei 225 stock index had fallen 2.2 percent, to 17,115.39.

Monday's data is preliminary, with a revision due Dec. 8. Since some of the decline was due to reductions in inventory, the actual trend may not be as weak as it appears, economists said.

Pierre Ellis, senior economist at Decision Economics in New York, said that consumer spending rose in the July-September quarter but the rebound was disappointing after such a sharp pullback in the second quarter.

And businesses have stepped up orders in the past three months for machinery, industrial equipment and other big ticket items, he said. That should boost output in the coming months.

Abe already was expected to announce additional economic stimulus this week. The dismal Monday morning data will probably lead him to announce a package worth about 3 trillion yen to 4 trillion yen ($26 billion to $35 billion), Nishioka said.

That could include subsidies to low-income families and help for small and medium size companies that rely on imported components and energy that have suffered as the Japanese yen has dropped from about 80 to the dollar to its current level of about 116 to the dollar.

Critics say Abe has failed to deliver on promises for drastic reforms of labor regulations, the tax system and the health industry, among other areas. Meanwhile, companies have largely refrained from passing windfall gains from share price gains and surging profits on to their workers in the form of higher wages.

If Abe dissolves the parliament this week for a general election in mid-December, work on some of those initiatives will be tabled, slowing progress still further.


AP Economics Writer Christopher S. Rugaber in Washington contributed to this report.


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