Published February 16, 2009

GDP blow could send Japan reeling

Today's numbers may be worse than the bleakest forecasts, stir political storm

By ANTHONY ROWLEY
IN TOKYO

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MARKETS are bracing for bad news today when Japan announces GDP figures for the final quarter of 2008 - a period in which the economy is widely forecast to have contracted at a double-digit annual rate. But the scale of the downturn could exceed even the most pessimistic expectations and provoke calls for the government to adopt more urgent stimulus measures.

All must go: A Tokyo shop advertising a closing- down sale. Economists are making dire predictions about the economy

The situation is doubly serious for the government as it confronts a political as well as an economic crisis. Prime Minister Taro Aso is struggling to retain credibility even with his own Liberal Democratic Party (LDP) after coming under attack last week from former prime minister Junichiro Koizumi, who dismissed as 'laughable' some of Mr Aso's policy statements.

Estimates are that Japan's GDP shrank in size by anything from 2.3 per cent to 3.8 per cent - or at an annualised rate of 9-14 per cent - in the final three months of last year as exports plummeted at dizzying rates and as industrial output crashed at its fastest rate in 30 years.

Economists are predicting similarly dire plunges in output for the first quarter of this year and beyond.

Deutsche Bank has even suggested that the economy could contract by a massive 6 per cent this year and then shrink again next year before bottoming out in 2011. 'We have become convinced that the ongoing downturn will likely drive the Japanese economy to the most severe depression in the post-World War II era, in terms of both depth and duration,' it said.

'It is neither a downturn nor recession anymore, but a severe depression.'

Manufacturing activity accounts for one-fifth of GDP and is likely to contract by an overall 30 per cent in Q4 2008 and the first quarter of this year, said chief economist Richard Jerram at Macquarie Securities.

'This a staggering hit to the economy,' he said. 'Rather than responding to this unprecedented shock with an unprecedentedly aggressive policy response, the government seems to be adopting a fatalistic approach, which implies that exports will have to drive any recovery.'

The government is now talking of additional stimulus measures on top of the 12 trillion yen (S$197 billion) of spending already proposed, plus more than 60 trillion yen of financial guarantees and other off- budget spending. Public works spending on measures such as building cyber networks and improving energy efficiency are being discussed.

But a budget for financing even the stimulus proposed so far has still to get through Parliament, where the Opposition controls the Upper House while Mr Aso's LDP and its allies control the Lower House. The threat of revolt by Mr Koizumi and others against Mr Aso's unpopular scheme to distribute money to the public in an effort to stimulate consumer spending could spark a full-blown political crisis and provoke an early general election, analysts say.

Meanwhile, the economy is in danger of imploding, many analysts say. Industrial output crashed by a record 9.6 per cent in December compared to November, while unemployment surged from 3.9 per cent to 4.4 per cent - the biggest monthly jump since World War II. Economists have called the latest figures 'disastrous', while government officials admit that they see no end in sight to the downward spiral.

'Our leading index of the business cycle has fallen by 24 per cent since the peak and its pace is accelerating - which suggests that economic activity throughout 2009 will continue to deteriorate at a rapid pace,' said Deutsche Bank in a review.

'So far, the deterioration has been mainly concentrated in manufacturing activity but we believe this will spread to non-manufacturing sectors as well, through a deterioration in the labour market and the postponing of capital investment,' the bank added.

Deutsche Bank's forecast is that the economy will shrink by 2.3 per cent in the current fiscal year up to the end of March and then crumble by a dramatic 6 per cent in the new fiscal year beginning in April. It will then shrink by a further 0.9 per cent in fiscal 2010. 'Economic recovery at an annualised one per cent or higher will be delayed into 2011,' the bank added.

This would be a near-catastrophic outcome compared to the government's own forecast of a 0.1 per cent expansion in 2009.

The Bank of Japan has warned that the economy could contract by around 2 per cent this year while the IMF has suggested something nearer to 2.6 per cent. But today's GDP data may have many economists revising down their forecasts.