Japan’s economy shrank by a record last quarter amid an unprecedented collapse in exports and a drawdown of inventories that could pave the way for a recovery later this year, a report next week may show.
Gross domestic product contracted an annualized 16.1 percent in the three months ended March 31, following a fourth- quarter drop of 12.1 percent, according to the median estimate of economists surveyed by Bloomberg News. The Cabinet Office will release the GDP report on May 20 at 8:50 a.m. in Tokyo.
Japan’s worst recession since World War II probably reached its bottom last quarter, as a pullback in business and consumer spending compounded the damage done by the export crash that began in October. World markets have shown signs of stabilizing in recent weeks and Prime Minister Taro Aso’s record 15.4 trillion yen ($160 billion) stimulus package has buoyed domestic confidence.
“The first-quarter numbers are awful, but what’s more important are the signs of recovery,” said Julian Jessop, chief economist at Capital Economics Ltd. in London. “Growth might turn positive again in the second quarter,” he said, citing recent rebounds in overseas shipments and production.
Exports plunged a record 26.8 percent last quarter from the previous three months, economists predict the report will show. Consumer spending probably fell 0.9 percent, as companies including Toyota Motor Corp., Toshiba Corp. and NEC Corp. slashed pay and fired thousands of workers to offset losses.
Spending Slump
The drop in private consumption would be the biggest since 1974, excluding the second quarter of 1997 when consumers cut spending 3.5 percent after an increase in the sales tax. Business investment is likely to have fallen 9 percent, the worst retrenchment on record.
“The good news is that the production cycle has hit bottom,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “The bad news is that the second-round effects from the initial export shock are starting to hit,” he said, referring to the recession’s spread to the job market. The unemployment rate surged to 4.8 percent in March from 4.4 percent the previous month, the biggest jump in four decades.
Japan’s first-quarter contraction was probably the most severe since records started in 1955, eclipsing a 13.1 percent plunge that came during the 1974 oil crisis. The drop would also be more than twice as bad as the U.S.’s 6.1 percent slide.
BOJ’s Shirakawa
Reports in the past month suggest the world’s second- largest economy may resume growth this quarter, albeit from a low level. Exports gained in March on a month-on-month basis, the first uptick since May. Factory production also rose, a fact that Bank of Japan Governor Masaaki Shirakawa cited yesterday as a reason for cautious optimism.
“We expect the pace of deterioration in economic conditions to moderate gradually and the economy to start to level out towards the end of this year,” Shirakawa said in a speech at the London Stock Exchange.
Gains in the stock market and earnings projections for the current year add to signs the worst may be over. The Nikkei 225 Stock Average has risen 29 percent from a 26-year low set on March 10. Japanese companies that reported fiscal 2008 results say profits will rise 26 percent in the current business year, according to Tokyo-based Shinko Research Institute Co.
Confidence in the Japanese economy climbed to an 18-month high in May, the Bloomberg Professional Global Confidence Index showed yesterday. Sentiment among Bloomberg users around the world surged the most since the survey began in November 2007.
Replenishing Inventories
Stabilizing demand from Japan’s biggest overseas markets, combined with aggressive inventory cuts, has given companies including Honda Motor Corp. room to raise production. Executive Vice President Koichi Kondo said last month the U.S. has probably bottomed. The automaker plans to boost output at domestic factories this quarter as dealerships clear inventories, the Wall Street Journal reported this week.
The stock adjustment at Honda is part of larger trend among manufacturers that may have exacerbated Japan’s first- quarter contraction, while also setting the stage for recovery. Falling inventories at Japanese companies probably accounted for 0.8 percentage point, almost a fifth, of the economy’s estimated 4.3 percent decline versus the previous three months.
“Firms cut production below the low of final demand. That’s what happened in the first quarter and that’s why the contraction was so severe,” said BNP’s Shiraishi. “Now that the adjustment is coming to an end firms can start to increase production. The rebound could potentially be fairly large.”
Still, the failure of export demand to do better than simply stabilize will probably limit the scope of Japan’s recovery, said Jessop at Capital Economics.
“The best you can hope for is a long period of sub-par growth,” he said. “It’s not going to be a strong recovery but at least it’ll be a recovery.”
Gross domestic product contracted an annualized 16.1 percent in the three months ended March 31, following a fourth- quarter drop of 12.1 percent, according to the median estimate of economists surveyed by Bloomberg News. The Cabinet Office will release the GDP report on May 20 at 8:50 a.m. in Tokyo.
Japan’s worst recession since World War II probably reached its bottom last quarter, as a pullback in business and consumer spending compounded the damage done by the export crash that began in October. World markets have shown signs of stabilizing in recent weeks and Prime Minister Taro Aso’s record 15.4 trillion yen ($160 billion) stimulus package has buoyed domestic confidence.
“The first-quarter numbers are awful, but what’s more important are the signs of recovery,” said Julian Jessop, chief economist at Capital Economics Ltd. in London. “Growth might turn positive again in the second quarter,” he said, citing recent rebounds in overseas shipments and production.
Exports plunged a record 26.8 percent last quarter from the previous three months, economists predict the report will show. Consumer spending probably fell 0.9 percent, as companies including Toyota Motor Corp., Toshiba Corp. and NEC Corp. slashed pay and fired thousands of workers to offset losses.
Spending Slump
The drop in private consumption would be the biggest since 1974, excluding the second quarter of 1997 when consumers cut spending 3.5 percent after an increase in the sales tax. Business investment is likely to have fallen 9 percent, the worst retrenchment on record.
“The good news is that the production cycle has hit bottom,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “The bad news is that the second-round effects from the initial export shock are starting to hit,” he said, referring to the recession’s spread to the job market. The unemployment rate surged to 4.8 percent in March from 4.4 percent the previous month, the biggest jump in four decades.
Japan’s first-quarter contraction was probably the most severe since records started in 1955, eclipsing a 13.1 percent plunge that came during the 1974 oil crisis. The drop would also be more than twice as bad as the U.S.’s 6.1 percent slide.
BOJ’s Shirakawa
Reports in the past month suggest the world’s second- largest economy may resume growth this quarter, albeit from a low level. Exports gained in March on a month-on-month basis, the first uptick since May. Factory production also rose, a fact that Bank of Japan Governor Masaaki Shirakawa cited yesterday as a reason for cautious optimism.
“We expect the pace of deterioration in economic conditions to moderate gradually and the economy to start to level out towards the end of this year,” Shirakawa said in a speech at the London Stock Exchange.
Gains in the stock market and earnings projections for the current year add to signs the worst may be over. The Nikkei 225 Stock Average has risen 29 percent from a 26-year low set on March 10. Japanese companies that reported fiscal 2008 results say profits will rise 26 percent in the current business year, according to Tokyo-based Shinko Research Institute Co.
Confidence in the Japanese economy climbed to an 18-month high in May, the Bloomberg Professional Global Confidence Index showed yesterday. Sentiment among Bloomberg users around the world surged the most since the survey began in November 2007.
Replenishing Inventories
Stabilizing demand from Japan’s biggest overseas markets, combined with aggressive inventory cuts, has given companies including Honda Motor Corp. room to raise production. Executive Vice President Koichi Kondo said last month the U.S. has probably bottomed. The automaker plans to boost output at domestic factories this quarter as dealerships clear inventories, the Wall Street Journal reported this week.
The stock adjustment at Honda is part of larger trend among manufacturers that may have exacerbated Japan’s first- quarter contraction, while also setting the stage for recovery. Falling inventories at Japanese companies probably accounted for 0.8 percentage point, almost a fifth, of the economy’s estimated 4.3 percent decline versus the previous three months.
“Firms cut production below the low of final demand. That’s what happened in the first quarter and that’s why the contraction was so severe,” said BNP’s Shiraishi. “Now that the adjustment is coming to an end firms can start to increase production. The rebound could potentially be fairly large.”
Still, the failure of export demand to do better than simply stabilize will probably limit the scope of Japan’s recovery, said Jessop at Capital Economics.
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