Japan’s economy had been seen as relatively immune to the ravages of the credit crisis hitting the US and Europe.
Its banks were much healthier than those on either side of the Atlantic; it was benefiting from an export boom to the rest of Asia; and its economy grew unexpectedly quickly in the first quarter of the year, recording an expansion of 0.8 per cent, four times the rate of anaemic US growth.
But although a bad quarter was expected – and there was an almost equally bad period exactly a year earlier – the contraction of Japan’s gross domestic product by 0.6 per cent in the second quarter has jolted everyone out of any complacency that the world’s second largest economy could continue to operate untouched by events elsewhere.
The quarterly decline was its sharpest in seven years, and makes Japan the biggest economy yet to experience economic contraction this year. Italy, Canada, Denmark and New Zealand have also reported negative growth.
With the year-on-year growth falling to 1 per cent compared with 1.8 per cent in the second quarter of 2007, Akira Maekawa, economist at UBS in Tokyo, said: “This [quarter] makes it all the more clear that the economy is slowing down.”
There is even the chance that Japan’s long but weak economic upswing since 2001 might come to an end with a slide into recession towards the end of the year.
Japan, which imports most of its energy, has been hit by the sharp rise in the prices of oil and other commodities, which have squeezed companies and households alike, reducing their ability to spend and the economy to grow.
Domestic demand fell 0.6 per cent in the second quarter, having risen by 0.4 per cent in the January-to-March period. It was driven lower by very sharp falls in household consumption and government capital spending.
Exports were also weak with net trade contributing nothing to economic growth, having added 0.4 percentage points on average in each of the three previous quarters.
Exports fell 2.3 per cent quarter-on-quarter after a strong run, and the contribution of net exports to GDP growth was zero.
“Exports are in a very tough situation,” said Bunmei Ibuki, finance minister.
Given the downturn in the global economy and rising input prices, some economists believe the slowdown in the Japanese economy will continue for some time.
“We expect very sluggish economic momentum throughout fiscal year 2008, putting the real growth rate below 1 per cent for the year”, ending March 2009, the Royal Bank of Scotland said in a report.
But given Japan’s weakness relative to other advanced economies since its credit and housing bubble burst in the early 1990s, many economists still saw the bright side in Wednesday’s figures.
They expect the downturn will be mild compared to what the country experienced in 2001.
“The details of the second quarter GDP report do not point to a severe recession,” writes Kenichi Kawasaki, economist at Lehman Brothers in Tokyo. “The economy has eliminated excesses built up in the aftermath of the late 1980s bubble, and the fundamentals of the economy are much better than in the previous post-bubble cycles,” he added.
Julian Jessop, chief international economist at Capital Economics, said the economy “is still in relatively good shape compared to similar points in previous downturns”.
