Japan in high risk of deflation, Q4 GDP falls 12.7% yr-on-yr

16 February 2009 06:51  [Source: ICIS news]

(Recasts headline and lead for clarity)

By Pearl Bantillo

SINGAPORE (ICIS news)--Japan recorded its steepest gross domestic product (GDP) contraction in more than three decades in the fourth quarter and runs a high risk of re-entering a deflationary period amid the global economic slump, economists said.

Official government data showed that Asia’s biggest economy shrank an annual 12.7% in the October to December period and down 3.3% quarter-on-quarter, the worst performance seen since 1974.

It was also Japan's third consecutive quarterly decline in economic output largely because of its dependence on exports.

Japan was last beset by an environment of falling prices in the 1990s.

The contradiction between Japan’s deteriorating economic fundamentals and a strong yen poses a big challenge to its policy-makers on how to go about boosting domestic economic activity, they said.

The dollar-yen pair is expected to stay low, hovering around Yen(Y)90 in the next few months despite the weak Japanese economy, economists said.

“That will continue to crimp export growth” and weaken Japan’s economy further, said Thomas Lam, Singapore-based treasury economist at United Overseas Bank.

Japan’s corporate sector, including petrochemical companies, has been bleeding from the combination of sharp decline in global demand and the substantial strengthening of the Japanese yen against other currencies.

Petrochemical production in Japan has been sluggish in February due to the slowdown in the domestic economy and also from weaker exports.

“Stocks in Japan are at low levels now due to the financial year-end, hence there has been very little domestic demand for raw materials,” said a cracker operator.

Downstream polymer production rates have dropped to as low as 40-50% in the first quarter, he said.

Japanese manufacturers typically keep low stocks during this period and will resume buying activity in April, he added.

Industrial production in Japan fell significantly in the past quarter due to the slump in automobiles and electronics, said Naito Toshihiko, economist at Japan Credit Ratings Agency.

What Japan needs is to boost public spending and mirror the magnitude of fiscal stimulus packages introduced in the US and China to buoy up domestic activities, said Toshihiko.

“There’s a possibility we will face a deflation,” said Toshihiko. “The Bank of Japan (central bank) has to act more aggressively on policies and we need more stimulus packages to boost demand.”

To ease the pressure on its corporate sector, the government can consider cutting the tax rate from the current 50% to 30%, he said.

But the economy’s recovery critically depends on a rebound in external demand, economists said.

Japan could not decouple (from other economies),” Toshihiko said. JCR projects Japan GDP to contract 2.0% for the fiscal year ending March 2009.

UOB’s Lam pointed out that 90% of GDP contraction in the December quarter was attributable to the fall in external demand.

Japan, like any other Asian countries, depends on the external environment for support. The US plays a crucial role on how things will shape up,” Lam said.

With additional reporting by Steve Tan

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By: Pearl Bantillo
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