Recession looms as Japanese economy shrinks

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Japan (EUREX: FMJP.EX - news) 's economy shrank in the September quarter for the first time since last year, adding to signs that slowing global growth and tensions with China are nudging the world's third-largest economy into recession.

The 0.9pc fall in GDP was in line with expectations, although a decline in capital expenditure was much steeper than forecast. Sony (Other OTC: SNEJF.PK - news) and Panasonic (Berlin: MAT1.BE - news) have slashed spending plans to cope with massive losses as they struggle with competitive markets and a strong yen.

The fall in GDP translated into an annualised rate of decline of 3.5pc, government data showed on Monday. While US growth showed a modest pick up in the third quarter, Japan and the eurozone economies are shrinking.

"The GDP data confirms that the economy has fallen into a recession ," said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. "It is set for a second straight quarter of contraction in the current quarter."

A recession is commonly defined as two consecutive quarters of contraction.

The data kept government pressure on the Bank of Japan to boost monetary stimulus even after it eased policy in October for the second straight month as a strong yen and a territorial row with China exacerbate weak demand for exports.

Economy Minister Seiji Maehara said the central bank should pursue powerful policy easing to boost the economy, although BOJ Governor Masaaki Shirakawa shot back that the government should do its bit too.

Many analysts expect the BOJ to leave policy unchanged at a review next week, but some see it boosting stimulus again at a December 19 and 20 meeting, shortly after the US Federal Reserve is due to meet.

External demand accounted for 0.7 percentage points of July to September GDP contraction, matching the median projection. Japan's exports fell 5pc in July to September, the biggest slide since a 6pc decline in April-June last year, the data showed.

A row with China over sovereignty of some islands in the East China Sea sparked violent protests in China and the boycott of Japanese goods, which added to the slide in exports, particularly for automakers such as Nissan.

Private consumption - which accounts for roughly 60pc of the economy - fell 0.5pc in the third quarter against a median forecast of a 0.6pc drop.

Capital expenditure tumbled 3.2pc, the fastest pace of decline since a 5.5pc drop in April-June 2009, as companies turned more pessimistic about earnings from domestic and overseas markets.

In Japan's ailing electronics sector, Sony plans to reduce capital spending by 29pc in the year to March 2013 and Panasonic plans a 27pc cut, after incurring huge losses in their TV manufacturing businesses.

The companies are struggling to compete with more nimble rivals, such as South Korea's Samsung and America's Apple (NasdaqGS: AAPL - news) , and with a steady rise in the yen, which makes exports from Japan more expensive.