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Japan's recession is worse than feared

Latest update : 2008-12-09

Japan's recession is worse than expected, according to revised figures published on Tuesday. The GDP of the world's second-largest economy contracted by 0.5% in the third quarter and not 0.1% as initial estimates suggested.

AFP - Japan sank much deeper into recession than previously thought in the third quarter as firms slashed investment to cope with the financial crisis, official figures showed Tuesday.

Underscoring the rapidly worsening situation, Sony Corp. said it was cutting 8,000 jobs, axing about 10 percent of its global manufacturing sites and exiting unprofitable businesses to cope with the economic downturn.

Japan's economy shrank 0.5 percent in the three months to September -- 1.8 percent on an annualised basis -- entering its first recession in seven years with a second straight quarter of negative growth, the government said.

The gloomy snapshot of Asia's largest economy raised fears that the downturn will be deeper and longer than previously expected, which analysts said could prompt the central bank to cut interest rates again to almost zero.

An initial estimate last month had shown the Japanese economy shrank 0.1 percent in the third quarter, and 0.4 percent on an annualised basis.

"The data suggests that the economy is contracting faster than previously thought, and the depth of the recession will be more severe," said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong.

"We still haven't really seen the damage to the economy in the fourth quarter. Japan is coming from a much weaker footing than previously thought," he said, predicting the recession will last until mid-2009.

Weak business investment was the main culprit for the revision as companies slashed spending on new equipment and factories by 2.0 percent, compared with an initial estimate of 1.7 percent.

Sony, seen as a bellwether of corporate Japan, said Tuesday that it would cut investment in its electronics business by about 30 percent and lay off about five percent of its 160,000 workers in its global electronics business.

Japan's export-dependent economy was also hit by sluggish overseas shipments as the global financial crisis hit international trade.

The latest snapshot of the Japanese economy was even worse than analyst forecasts for a contraction of about 0.2 percent quarter-on-quarter.

The government said the economy shrank a revised 1.0 percent in the second quarter, which was also slightly worse than previously thought.

Japan has relied on brisk exports of cars, electronics and other goods to drive its recovery from recession in the 1990s.

But it has seen exports weaken in recent months due to worsening demand in recession-hit overseas economies.

"Companies are facing a profit squeeze and there is pessimism about future demand so they will have to cut business investment in the coming quarters," said Tomoko Fujii, head of economics and strategy at Bank of America.

The grim figures raised expectations that Japan's central bank may reduce borrowing costs again to spur economic growth.

The Bank of Japan in October cut interest rates for the first time in seven years, by 20 basis points to 0.3 percent, as part of efforts to calm volatile markets and boost the recession-hit economy.

Japan's central bank is likely to cut interest rates again, probably in February by 20 basis points to just 0.1 percent, Fujii predicted.

Date created : 2008-12-09

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