Japan economy shrinks for a third quarter in a row

Thursday 14 February 2013 16.58
Japan economy sees third quarter of contraction in a row
Japan economy sees third quarter of contraction in a row

Japan's economy shrank in the last three months of 2012, its third quarter of contraction in a row. 

This gives the government ammunition to defend its "weak yen" strategy as necessary to getting growth back on track.

The 0.4% contraction in annualised terms in the three months from October to December was worse than expected.

Many analysts had forecast the economy would emerge from recession in the final quarter of 2012 as the Japanese yen weakened against other major currencies, giving a boost to Japanese export manufacturers.

Chief government spokesman Yoshihide Suga acknowledged the lingering weakness in the economy, while voicing optimism over a global recovery. "We also expect our nation's economy to make a gradual recovery," he said.

The data predate Prime Minister Shinzo Abe's administration, which took power in late December with a platform of aggressive spending and monetary stimulus that has helped drive the yen to near three-year lows after years of hovering at much higher levels due to the currency's status as a "safe haven" for investors.

Although the government has not directly intervened to bring the yen's value lower, its policies have convinced many in the markets that more money will be created, undermining its value.

That has brought on a 20% depreciation of the yen against the dollar since October, raising concern over the potential for competitive devaluations of other currencies that could undermine growth.

The issue will likely come up at a meeting of top financial officials of the Group of 20 leading industrial and developing countries in Moscow beginning tomorrow.

In a statement issued earlier this week, the Group of Seven richest nations - which also includes Japan - issued a statement reaffirming their commitment to exchange rates driven by the market and not government or central bank policies.

The G-7 statement's lack of any direct criticism of Japan's economic strategy effectively encouraged traders to continue selling the yen.

Meanwhile, the Bank of Japan left monetary policy unchanged following a two-day meeting that ended today, noting in a statement that "Japan's economy appears to have stopped weakening." The current central bank governor, Masaaki Shirakawa, is due to step down on March 19.

And the lower house of Japan's parliament approved a 13.1 trillion yen ($140 billion) supplementary budget for fiscal 2012, which ends in March, to support the stimulus programme.

Although the opposition-dominated upper house of parliament may reject the budget, the approval by the lower house, which is controlled by Abe's Liberal Democratic Party, will prevail.

Japan's growth has stagnated since its "bubble economy" burst in the early 1990s, despite massive investments in public works that have pushed its national debt to the highest level among major industrial nations, at more than twice the size of the economy.

Last year began on an upbeat note with annual growth in the first quarter at 6%, spurred by strong government spending on reconstruction from the March 2011 tsunami disaster.

But the economy slipped back into contraction in the second quarter and deteriorated further as frictions with China over a territorial dispute hammered exports to one of Japan's largest overseas markets.

For all of 2012, the economy grew 1.9%, after a 0.6% contraction in 2011. Despite the dismal data for last year, many in Japan expect at least a temporary bump to growth from higher government spending on public works and other programmes.

An index measuring consumer confidence, released earlier this week, jumped to its highest level since 2007, the biggest ever increase in a single month.

Earlier this week, the government appealed to businesses to raise wages to help boost domestic demand and carry on momentum from government spending.

Data for the fourth quarter showed that private consumption, which accounts for more than two-thirds of Japan's economic activity, rose 0.4% in the fourth quarter while housing investment climbed 3.5%. Investment by businesses, however, fell 2.6% and exports dropped 3.7%.

Keywords: japan, economy