Worst Isn't Over for Japan

Via The Wall Street Journal

By YUKA HAYASHI

TOKYO -- The worst isn't over for Japan.

The world's second largest economy contracted at its sharpest pace in nearly 35 years during the last quarter of 2008. Now, it's likely to continue to underperform other major nations early this year as demand for its manufactured goods collapses all over the world amid a deepening global economic crisis.

Japan's gross domestic product shrank by an annualized pace of 12.7% during the quarter, the government said Monday, a steeper decline than a contraction of 3.8% reported earlier for the U.S. and 5.9% in the euro-zone for the same period. A big reason was an unprecedented 14% decline in exports on quarter and sharply lower capital spending by companies.

Exporters including Toyota Motor Corp., Nissan Motor Co., Sony Corp. and NEC Corp. have all warned of hefty losses for the current fiscal year ending March, and unveiled restructuring plans that would together eliminate tends of thousands of manufacturing jobs over the coming months. This could further dampen consumer spending.

Already, data point to further deterioration in the economy. Industrial output is expected to drop by around 20% during the first quarter, a government survey says. After tumbling by a record 35% in December, exports sank 46% from a year earlier during the first 20 days of January. In this environment, the jobless rate could climb to an all-time high of 6% or so later this year, from 4.4% in December, economists say.

"It's very likely we'll see another double-digit decline for the current quarter," says Yoshiki Shinke, an economist for Dai-Ichi Life Research Institute.

The latest GDP data highlighted the vulnerability of a nation that for years relied on global trade to fuel its growth. Even though Japan has escaped a housing bubble and crippling credit losses that now weigh on the U.S. and Europe, its overall economy is shrinking much faster because it's exposed so much to consumer demand from elsewhere. Until the economy started shrinking in the second quarter of 2008, Japan had enjoyed six years of steady growth thanks to sharp increases in exports bound for the U.S. and fast-growing economies like China. Domestic demand, meanwhile remained static as workers' pay was kept low.

Exacerbating the economy's performance in the latest quarter was a rapid cool-down in exports bound for China and other Asian nations that had previously propped up Japan's economy long after demand for Japanese autos and high-end electronic products began to falter in the U.S. and Europe.

After growing 12% during the first half of 2008, Japan's exports to China began to erode in October, and fell a steep 36% in December. Japan was among the few developed nations that had previously boasted a trade surplus with China. That was because of shipments of high-tech materials and production machinery used by local manufacturing facilities owned by Japanese companies. Many of the finished goods were then shipped back to Japan or sold to other markets like the U.S. and Europe. Now that demand is shrinking both within China and for exports, such trade is suffering.

"Our sales in China began to falter around July, collapsed in October and are still dropping," said a spokesman for Union Tool Co., a Tokyo company that makes drills used to make holes in printed circuit boards, a critical component in electronic equipment from cellphones to personal computers. After reporting a 19% drop in its net profit for the year ended November, Union Tool, which derives nearly a half of its revenues from Asia including China, foresees a net loss for the six months through May, the first half-year loss in its history. To cope, the company recently said it would cut executive pay and reduced operations at its production facilities. Its factory in Shanghai operated only 15 days in January, compared with 28 to 29 days previously.

The economy is facing "without a doubt, the worst crisis since World War II," said economic minister Kaoru Yosano. He signaled the government's intention to compile a new economic stimulus package, which, according to Japanese media reports, could total 20 trillion to 30 trillion yen. His comment came in the wake of a weekend meeting of the Group of Seven nations in Rome where finance ministers and central bankers affirmed their commitments to "act together using the full range of policy tools" to support the economy.