Japan heading for worst recession since WW II: S&P

Japan, which has an S&P sovereign rating of AA/Stable/A-1+, now looks very likely to suffer its worst recession since World War II, says Standard & Poor's Ratings Services a new report, Is Japan's Economy In Freefall?, published today.

Standard & Poor's expects Japan to suffer real GDP shrinkage of 4.0 per cent in 2009, which would constitute the worst number in more than half a century, easily defeating the current postwar low of minus 2.0-per cent growth recorded in 1998, when Japan suffered its own financial crisis.

The country's GDP for the fourth quarter of 2008 plunged by an estimated 3.3 per cent from the previous three months, representing a stunning annualised contraction of 12.7 per cent and a year-on-year quarterly shrinkage of 4.6 per cent.

These constitute the worst quarterly GDP data since the first quarter of 1974, when the first so-called oil shock hit the Japanese economy.

GDP for 2008 as a whole is now estimated to have contracted by 0.7 per cent. Looking ahead, even if GDP remains flat at the 4Q 2008 level throughout 2009, Japan will still see negative GDP growth of 3.0 per cent from the previous year, given the withering contraction seen in the October-December period of 2008. The GDP outlook for 1Q 2009 remains bleak, with another annualised double-digit contraction expected.

It posted its largest ever trade deficit of a record $9.92 billion in January, its exports battered by the global economic slowdown (See: Japan's January trade deficit at its worst since WW II) with exports plunging 45.7 per cent in the month from a year earlier and a record 35 per cent in December. Its trade deficit rose for the fourth straight month as recession in the US and EU saw Japanese export of electronics, vehicles, auto parts, and semiconductors decline to its largest ever level since the past 28 years.  

The business climate for Japanese corporations is deteriorating dramatically amid a sharp decline in demand for products. Exporting giants Toyota and Sharp are both set to record their first fiscal year losses since becoming listed companies.

Other behemoths, including Nissan, Sony and Panasonic, are also on course to record net losses in the current fiscal year (ending March 31, 2009), and Japan's manufacturing sector as a whole may record a fiscal year loss.

Government action aimed at addressing the nation's economic woes has been relatively ineffective. The government is hamstrung by the stalemate in Japan's parliament, known as the Diet, and by the nation's weak fiscal position.

Critically, there is no consensus on basic economic and fiscal policy between the coalition and opposition parties, despite the emergency facing Japan's economy. As a result, the draft bill for the budget for fiscal 2009 (ending March 31, 2010) is currently stuck in the Diet.

For its part, the Bank of Japan (BoJ) may soon reduce its intervention rate again amid further deterioration in the economic climate, thereby effectively reverting back to a zero-interest-rate monetary policy.

However, this would represent a more meaningful response to the threat of deflation rather than a measure to address a lack of properly functioning financial intermediation.