Falling Down

Japan Slips Back Into Recession

T O K Y O, March 13 Reuters - Japan slipped into technical recession late last year as consumers tightened the grip on their wallets, but the government dismissed its own data and said the world's second-biggest economy was on the verge of recovery.

The contraction confirmed the difficulties in Japan's struggle to escape its worst downturn in half a century. Japan spent all of 1998 in recession, but economists said the detail in today's figures showed a light at the end of the tunnel.

"Can Japan grow? The answer is going to be a resounding yes," said Jesper Koll, chief economist at Merrill Lynch Japan.

The Incredible Shrinking Economy

The economy shrank 1.4 percent in October-December from the previous quarter, an annualized rate of 5.5 percent, government data showed. This was worse than the consensus forecast of a decline of about one percent and was at the low end of a range of private economists' forecasts.

Gross domestic product - the measure of all goods and services produced in the economy - was dragged down by slumping personal consumption by companies slashing winter bonuses, by fading government stimulus and by a fall in net exports.

The decline in GDP followed a one percent slide in July-September, marking the classic definition of a recession.

'Not a Recession'

Government officials shrugged off the quarterly drop as a one-time aberration, seizing instead on an unexpected rise in corporate capital spending and a subsequent improvement this year in personal consumption, the lion's share of economic activity.

"Although GDP was negative for two consecutive quarters, I do not consider this a recession," said Economic Planning Minister Taichi Sakaiya. "New areas of growth, such as in information technology, will pull the economy forward."

For the full calendar year, the economy eked out 0.3 percent growth as a first-half surge outweighed the late-year slowdown.

Some economists, however, cautioned that the economy is not out of the woods yet.

Profits, Sales Rise

Profits and sales are up and a recovery in capital spending is in sight, but it remains to be seen whether personal spending will recover, said Fuji Securities chief market economist Yasunari Ueno.

Profits are rising and industrial output has been surging, but consumers are reluctant to spend as companies undertake long-overdue restructuring and unemployment is near record highs.

Many economists also cite the unreliability of the figures, which ignore changes in Japan's economy - for example, much IT spending is excluded.

Sakaiya said he remained confident that the economy will post GDP growth in the fiscal year ending this month and would likely hit the government target of a 0.6 percent expansion - which would require a 2.0 percent January-March rebound.

Recovery?

Indeed, his agency appears set this week at last to declare an economic recovery.

Sakaiya said the agency on Friday will upgrade its assessment of the economy in its monthly report, adding that signs pointing to a self-sustaining recovery were growing.

Finance Minister Kiichi Miyazawa reiterated that he hopes the economic improvement will allow the government to avoid compiling another economic stimulus package later this year.

Japan's decade-long addiction to government spending has given the nation the worst public debt burden in the industrial world, scaring markets and putting its credit ratings in danger.

But some analysts say a supplementary budget is becoming more likely - not because of economic strength but because of political weakness. With Prime Minister Keizo Obuchi's popularity dropping due to a series of scandals and mishaps, senior officials say he will likely wait as long as possible to call general elections that must be held by mid-October.

"The most optimistic scenario for the election is probably some time in August or September, giving the government some time over the summer to put forward a supplementary budget proposal as a way to garner some votes and do well ahead of that election," said Lehman Brothers economist Matthew Poggi.