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06/10 22:20

Japan's Economy Shrank 0.2%; May Fall Into Recession (Update4)

By Yoshiko Matsushita, with reporting by Ann Saphir and Neha Kumar

Tokyo, June 11 (Bloomberg) -- Japan's economy unexpectedly shrank in the first quarter as business spending fell, leaving the nation on the brink of recession just two years after emerging from its last one.

Gross domestic product fell 0.2 percent in the three months ended March 31 from the previous quarter, seasonally adjusted as exports and business investment slid. Economists, who expected the economy to expand 0.1 percent, are also forecasting a contraction for the second quarter.

A return to recession may make it harder for new Prime Minister Junichiro Koizumi to keep his promise of curbing government spending and forcing banks to write off some of their worst loans. Yesterday, he said the public will have to bear some of the pain of fixing the economy.

``It is clear that any fiscal tightening will exacerbate a downturn,'' said James Malcolm, senior economist at J.P. Morgan Securities (Asia) Ltd. ``When it gets closer to the crunch, he will have to back down.''

The yen fell and bonds rose as investors bet the second- biggest economy won't recover anytime soon, meaning the central bank will keep interest rates close to zero, and may have to inject more money into the sagging economy.

The yen slid to 121.18 to the dollar, from 120.93 just before the report was released. The benchmark 10-year bond yield fell 1.5 basis points to 1.23 percent. The main Nikkei 225 stock average fell as much as 0.5 percent in early trading, led down by Advantest Corp.

`Nasty Recession'

While the government says Japan started pulling out of its third-deepest recession in April 1999, the economy has shrunk four of eight quarters since, extending a slump that began in 1990.

``We're probably in recession,'' said Richard Jerram, chief economist at ING Baring Securities (Japan) Ltd. ``I think in this second quarter the economy is shrinking, and probably will in the third as well.''

While the usual remedy for a recession is to cut taxes, boost government spending or lower interest rates, ``Koizumi is basically saying that's not going to happen,'' said Jerram. ``That raises the specter of a very nasty recession.''

In the fiscal year ended March 31, the economy grew 0.9 percent, missing the government's 1.2 percent target. The government may not meet its 1.7 percent target for this fiscal year either -- economists surveyed by Bloomberg News expect growth of just 0.7 percent.

Economic and Fiscal Policy Minister Heizo Takenaka said it will be ``extremely difficult'' to meet the target.

Business investment, the main source of economic growth the past two years, gave way in the first quarter, falling 1 percent from the fourth quarter, when it increased 6.7 percent. That was the first decline in three quarters.

Consumer Spending Unchanged

Companies have put expansion plans on hold as exports, mainly to the U.S. and neighboring Asian countries, fall. The drop in sales and income means companies have less need, and less money, to expand and modernize their factories.

Consumer spending, which accounts for about 55 percent of economic activity, was unchanged from the fourth quarter, after falling 0.6 percent in the fourth quarter. Japan's near-record high jobless rate and slowing wages growth have prompted people to save rather than spend, keeping the brakes on growth.

Consumer spending hasn't contributed to growth for the past three quarters.

Japan's shrinking trade surplus also weighed on growth as demand from the U.S. and Europe slowed. Net exports -- exports minus imports -- subtracted 0.2 percentage points from growth last quarter. Exports shrank 3.6 percent -- the first decline in two years -- while imports also fell 2.2 percent, the report showed.

Housing investment fell 5.2 percent in the first quarter from the previous quarter and government spending was unchanged.

Growth in the fourth quarter of last year was lowered to 0.6 percent from an initial estimate of 0.7 percent.

-- (M@rket.trends), June 11, 2001