Japans economy tiptoes towards recession as China row takes toll

Written by Reuters | Tokyo | Updated: Nov 13 2012, 10:01am hrs
Japans economy contracted in the latest quarter, signaling that like Europe it may already be in recession, further weighing down world growth.

On an annualised basis, the worlds No. 3 economy shrank 3.5% in the July-September quarter, the government reported on Monday. It was in line with gloomy forecasts after Japans territorial dispute with China hammered exports that were already weakened by feeble global demand.

The bad news will temper optimism over recoveries in China and the US, where some economists are predicting growth will top 3% in the third quarter. Chinas painful slowdown likely bottomed out in the third quarter, with recent indicators such as factory production and auto and retail sales showing improvement.

And Europe, though it may have turned a corner on its debt crisis as the financial system stabilizes, is forecast to get worse before it gets better.

Japans outlook remains bleak, with most economists forecasting a further decline in economic activity for the October-December quarter, which would officially put it in a recession according to the common definition of two consecutive quarters of contraction.

Consumer spending fell 0.5% in the third quarter, as subsidies for auto purchases expired, and corporate capital spending fell 3.2 percent. Spending on reconstruction from the countrys March 2011 tsunami and nuclear disasters has also weakened.

The drop for the current October-December quarter may not be as severe as that experienced in July-September.

If the economy does recover in any way it will be a minute rebound, said David Rea, an economist in London with Capital Economics.

He said the contraction in gross domestic product in the last quarter of 2012 could be a couple of percentage points.

More than two decades after Japans asset bubble burst in the early 1990s, its policymakers have yet to devise an effective strategy to help the economy break out of its deflationary funk. Meanwhile, the Japanese yen remains stubbornly high, discouraging its companies from investing at home and undermining its export competitiveness, especially against rivals Germany and South Korea.

Strangled by weak consumer spending and public investment, the economy grew at an anemic 0.3% annual pace in April-June, according to figures that were revised down from the originally reported 1.4%.

The robust 5.2% pace of growth in the first quarter had raised hopes the recovery had taken hold, and until recently, the government was still forecasting growth at about 2% for the year.

It had predicted a turnaround late in the year, but the renewed tensions with China over disputed islands in the East China Sea, coupled with sluggish growth in Europe have doused hopes for a significant rebound before 2013.