Japan recession worse than first reported

The recession that struck Japan after a tax increase in April was deeper than first reported, the government said on Monday, casting fresh doubt over its efforts to boost growth in the run-up to a general election.

According to the Cabinet Office’s first estimate three weeks ago, gross domestic product shrank at an annualised rate of 1.6 per cent between July and September, amid big cuts in companies’ inventories and falls in private investment.

Yet a revised estimate on Monday showed that real GDP slipped 1.9 per cent, with a contraction in spending by businesses twice as severe as first thought.

On a nominal basis, output slipped 0.9 per cent, marking the first quarter-on-quarter fall since Shinzo Abe returned to power in December 2012, vowing to overturn more than a decade of deflation.

The new numbers are a blow to Mr Abe, who called a snap poll last month in the hope of resetting the clock on a four-year electoral cycle, arguing that his mix of policies is “ the only way” for Japan to return to steady growth.

“The bankruptcy of ‘Abenomics’ is clear to everyone’s eyes,” said Tetsuro Fukuyama, policy chief of the main opposition Democratic party of Japan, in a statement after the GDP release. “Abenomics has brought about excessive yen weakening and bad inflation, hurt households and stalled consumption.”

Although the commitment to push up taxes on consumption was one made by the previous administration more than two years ago, it was one that the prime minister stood by, noted Tomo Kinoshita, chief economist at Nomura Securities in Tokyo, which must raise questions over his stewardship of the world’s third-largest economy. “He is in a difficult position,” he said.

However, analysts said that confirmation of another technical recession for Japan — its fourth since the Lehman crisis — is unlikely to affect the outcome of the poll on December 14, the announcement of which caught the DPJ and other parties on the hop.

Estimates by the nation’s biggest newspapers suggest that the ruling Liberal Democratic party will retain its strong grip on power, potentially extending the two-thirds majority in Japan’s lower house of parliament it enjoys with its coalition partner, Komeito.

A survey published by the Mainichi newspaper on Monday went so far as to suggest that the LDP could achieve a “super majority” on its own, taking as many as 320 of the 475 seats available.

The original GDP report last month wrongfooted most economists, who had expected a modest rebound after the tax-hit second quarter. Many had gone on to predict that the second set of data would be stronger, noting figures last week from the finance ministry which indicated a quarterly rise in investment by profitmaking companies with capital of Y10m ($80,000) or more.

Separate data on Monday showed that Japan’s current account posted a higher-than-expected surplus of Y947bn in October. The seasonally adjusted figure, the strongest since the earthquake of March 2011, was the result of improved exports, a surge in receipts from tourism and the big drop in the yen, which has pushed up the value of investment income received from abroad.

That brighter data, combined with positive employment data from the US on Friday, meant that Japanese stocks shrugged off the weaker GDP numbers on Monday, closing slightly higher at the lunchtime break.

“Market participants are looking more closely at the impact of the stronger US economy and the weaker yen,” said Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch in Tokyo.