Japan's economy slides into recession

New numbers released by the Japanese government indicate the country has entered a recession.

New numbers released by the Japanese government indicate the country has entered a recession.

Japan's economy shrank by 0.4 per cent in the July-September period after having declined 3.7 per cent in its second quarter, according to figures released on Monday.

The technical definition of a recession is two consecutive quarters of contraction.

It is the first time Japan, the world's second largest economy, has entered a recession since 2001.

Asian markets closed relatively flat on the news of the recession.

Japan's benchmark Nikkei 225 stock average closed 60.19 points higher, a 0.7 per cent gain, at 8,522.58 after trading as high as 8767.98. Hong Kong's Hang Seng index gave up early gains to dip 0.1 per cent to 13,529.53.

Business investment — a main driver of Japan's six-year economic recovery since 2002 — dropped 1.7 per cent from the previous quarter, according to the government data.

Officials warned on Monday that Japan's economy could continue to contract over the coming months.

Falling demand for automobiles, electronics

"Looking forward, we can see that as the global economy is expected to slow down for the time being, downward movements [in Japan] are expected to continue," said Japan Economy Minister Kaoru Yosano.

Japan's economy will likely continue to be hit as overseas demand for automobiles and electronics falls during the global financial decline, said Glen Maguire, chief economist at Société Générale investment bank.

"What we're starting to see is the extent of deterioration in external demand start to weigh more heavily on the Japanese economy," Maguire said, "and I think looking forward, there's every indication that dynamic is going to continue."

A strengthening yen is also hurting the Japanese economy because it has resulted in exporters slashing their profit, sales and spending projections for the full fiscal year through March, Maguire said.

Monday's data showed that net exports sapped 0.2 percentage points from growth, as the high cost of importing fuel eclipsed a slight increase in outbound shipments.

Toyota Motor Corp. has cut its forecast of net full-year profit to 550 billion yen — about a third of last year's earnings.

'Severe recession'

Sony Corp., whose July-September profit plunged 72 per cent, expects to make 59 per cent less this fiscal year than last year.

"We are now looking for a severe recession, similar to that during Japan's own financial market crisis in 1997 to 1998, and to the current U.S. recession, in terms of depth of real GDP contraction," said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo.

The Organization for Economic Co-operation and Development (OECD) issued a forecast last week predicting that the world's most developed economies are going to continue to contract over the next year.

Japanese Prime Minister Taro Aso has unveiled two economic stimulus packages in an effort to cushion the country during the global financial crisis.

His latest 27 trillion-yen proposal includes expanded credits for small businesses and two trillion yen in cash disbursements to households.

The Bank of Japan has also cut its key interest rate for the first time in more than seven years, lowering it to 0.3 per cent, joining central banks around the world in trimming borrowing costs.

Opposition demands new budget

Japan's opposition Democratic Party threatened to boycott parliament if Aso does not submit an updated budget amid the recession.

Aso said he met with Democratic Party Leader Ichiro Ozawa on Monday, who urged him to submit a new budget outlining how the government will finance its stimulus package.

Aso told reporters on Monday he had told the opposition that the government is working on a budget. "I couldn't say clearly when we would submit it. We are making efforts," Aso said.

With files from the Associated Press