Japan in Recession Again?!! But how?

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[SIZE=3]Japan Falls Into Recession as 4th-Qtr GDP Shrinks (Update10)[/SIZE]

Feb. 16 (Bloomberg) -- Japan's economy unexpectedly fell into recession last year for the fourth time in 13 years as consumer spending declined and exports faltered. The yen weakened.

Gross domestic product contracted at an annual 0.5 percent pace in the quarter to Dec. 31, the Cabinet Office said in a report in Tokyo today. The median forecast of 27 economists surveyed by Bloomberg News was for 0.7 percent growth. Revised figures showed the economy shrank for three straight quarters.

Higher taxes and falling wages may further damp consumer spending, leaving the 503 trillion yen ($4.8 trillion) economy dependent on exports to China and the U.S. for growth. Finance Minister Sadakazu Tanigaki said the contraction won't change plans for spending cuts and tax increases to curb the world's largest public debt.

``What Japan's economy ultimately needs to achieve stable growth is consumer spending,'' said Naoki Iizuka, chief economist at Dai-Ichi Life Research Institute, who predicted the contraction. ``A premature policy change, such as raising taxes, could cause the economy to falter.''

The report of a Japanese recession comes a day after Germany, the world's third-largest economy, reported a surprise decline in GDP in the fourth quarter and Italy also posted a contraction, dragging down the pace of growth in the 12 nations sharing the euro to half what economists expected.

[SIZE=3]Yen Declines[/SIZE]
The yen fell to 105.13 to the dollar at 10:42 a.m. in London from 104.41 late yesterday in New York. Benchmark 10-year Japanese government bonds rose, pushing the yield down 3.5 basis points to 1.415 percent. A basis point is 0.01 percentage point. The Nikkei 225 Stock Average fell 0.4 percent to 11,601.68 at the 3 p.m. close of trading.

The economy grew 2.6 percent in real terms in 2004, the fastest pace since 1996, lagging the 4.4 percent expansion in the U.S. and China's 9.5 percent growth.

As with previous recoveries since Japan's bubble economy burst a decade ago, a surge in consumer spending failed to gain momentum. After growing at a 5.8 percent pace in the first quarter, the economy shrank 0.8 percent in the second quarter and 1.1 percent in the third.

``The report forced some investors to acknowledge that Japan's economy is in a recession and not just a slowdown,'' said Satoshi Yamada, who helps oversee the equivalent of about $4.2 billion in Tokyo at Japan Investment Trust Management Co.

[SIZE=3]`Moderate' Recovery[/SIZE]
Tanigaki said the technical definition of a recession, two consecutive periods of quarter-on-quarter contraction, doesn't apply to Japan. Like the U.S., Japan has a committee that marks recessions using criteria other than GDP growth alone.

``We haven't changed our assessment that the economy is still on a moderate pace of recovery,'' Prime Minister Junichiro Koizumi told reporters.

A government report last week showing machinery orders rose 6 percent in the fourth quarter revived optimism that exporters will increase investment in anticipation of higher sales.

``The chip industry has gone into an adjustment period and that phase will probably see bottom sometime this summer,'' Terry Higashi, chairman of Tokyo Electron Ltd., the world's No. 2 maker of chip-making equipment, said in a Feb. 14 interview.

[SIZE=3]Chip Glut[/SIZE]
Export growth of 1.3 percent was outpaced by a 3.1 percent increase in imports in the fourth quarter. Net exports, or the difference between exports and imports, subtracted 0.2 percentage point from growth.

A worldwide glut of computer chips used to build mobile phones and personal computers has taken a toll on earnings and sales of Japanese exporters.

Hoya Corp., the world's largest supplier of glass plates used in products such as Apple Computer Inc.'s iPod portable music player, said profit growth slowed in the three months ended Dec. 31 and may slump further this quarter.

Sony Corp., the world's second-largest consumer electronics maker, on Jan. 20 slashed its operating profit forecast by 31 percent to 110 billion yen, citing falling prices of digital products including flat-screen televisions and DVD recorders.

Capital spending rose 0.7 percent from the previous quarter, today's report showed, less than the 1.3 percent increase forecast by economists.

[SIZE=3]Consumer Decline[/SIZE]
Consumer spending fell 0.3 percent. The decline reduced economic growth by 0.2 percentage point in the quarter.

Spending has faltered as companies hire more part-time workers, who typically earn less and receive fewer benefits. Wages have fallen for 43 of the past 46 months and the full-time labor force contracted for the seventh straight year in 2004.

Three tropical storms in the quarter, including the biggest in more than a decade, kept shoppers at home, curbing sales at department stores. Tanigaki said in an interview today the government will push ahead with plans to phase out income tax rebates adopted in 1999, part of measures to curb public debt projected to reach 151 percent of GDP by March 2006.

Seiyu Ltd., Japan's fourth-largest retailer, yesterday reported a loss of 12.3 billion yen for the year ended Dec. 31, three times more than forecast on Oct. 29.

More than six years of deflation have taken a toll on the economy. Prices as measured by the GDP deflator fell 0.3 percent from a year earlier, less than the 1.1 percent decline predicted by economists.

[SIZE=3]Rate Meeting[/SIZE]
Bank of Japan Governor Toshihiko Fukui and his policy-making colleagues will tomorrow probably leave interest rates almost at zero, where they have been since March 2001, said all 14 economists surveyed by Bloomberg News.

Nominal GDP, which isn't adjusted for price changes, was unchanged in the fourth quarter from the previous quarter, today's report said. Nominal GDP expanded 1.4 percent last year, the first gain in four years.

Quarter-on-quarter, the economy shrank 0.1 percent in the three months to Dec. 31. Germany reported a 0.2 percent contraction for the same quarter yesterday, while Italy's GDP fell 0.3 percent. Gross domestic product contracted 0.2 percent in the second quarter and 0.3 percent in the following period, revised figures showed.

The economy would have to expand at an annualized pace of 8.9 percent this quarter to meet the government's forecast for 2.1 percent growth in the fiscal year ending March 31.

From a year earlier, the economy grew 0.6 percent in real terms in the fourth quarter.

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