Japan's economy slumps as global crisis widens

Reuters

Posted at Feb 17 2009 03:42 AM | Updated as of Feb 17 2009 11:42 AM

TOKYO - Japan sank deeper into recession with its worst quarterly contraction since the oil crisis in the 1970s, its reliance on exports and soft domestic demand dragging down the world's second-largest economy.

Hillary Clinton, in Tokyo on her first trip abroad as U.S. secretary of state, said Asia and the United States must fight the global crisis together.

She said the US-Japanese relationship was founded on a "commitment to our shared security and prosperity, but we also know that we have to work together to address the global financial crisis."

The grim Japanese figures, coupled with disappointment over the lack of coordinated action from the G7 and worries about bank rescue plans pushed European shares down by 0.6 percent in morning trade.

In Rome, G7 financial leaders, fearing a 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession but major world economies still faced the biggest downturn in decades.

"The outlook for the global and euro area economy in 2009 appears dismal," European Central Bank Governing Council member George Provopoulos said on Monday.

"The current crisis is the biggest since the 1930s and exiting from it will not be easy or quick."

Further action

The Bank of England said it would probably have to take further action to boost Britain's waning economy but recovery could start later in the year.

"A sharp contraction in activity, both here and abroad, is already baked into the cake for the first half of this year," Deputy Governor Charles Bean said in a speech on Monday.

Falling demand forced German car maker BMW to announce it was shedding 850 jobs and cutting back production of the Mini at its factory near Oxford in central England.

European Central Bank President Jean-Claude Trichet warned policymakers they must avoid sowing the seeds of future crises in their efforts to revive economies.

Decisions made today should "not lay the ground for similar disorder in the future," he said in a speech to European parliamentarians.

In India the government said spending may have to rise sharply this year to shield the economy from the global credit crunch. The announcement in an interim budget worried investors and credit rating agency Standard and Poors said it planned to review the Asian giant's domestic debt rating.

Singapore Airlines said it planned to cut capacity by 11 percent in the year from April in the face of waning travel and cargo demand.

The German government is considering emergency measures to rescue the stricken bank Hypo Real Estate, whose shares have fallen by 97 percent over the last 18 months.

In Europe, the Czech Republic approved an economic stimulus package, Hungary announced plans to reform its tax code to help boost the economy, and Bulgaria said its economic growth nearly halved in the fourth quarter of last year.

Global crisis

Even though Japan has been relatively insulated from the collapse of the U.S. credit and housing markets that precipitated the global crisis, Economics Minister Kaoru Yosano said his country faced its worst economic crisis since World War Two.

With demand for its cars and electronics waning, an unprecedented slump in exports saw Japan's economy shrink by 3.3 percent in the fourth quarter of 2008, or an annual rate of 12.7 percent, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974.

Adding to the Japanese government's woes, finance minister Shoichi Nakagawa faced calls for his resignation on Monday after denying he was drunk at a G7 news conference. He said he had taken too much cough medicine.

Japan has suffered a sharper contraction than other major economies because of its heavy dependence on exports combined with persistently soft domestic consumption.

"The data showed a severe picture of the Japanese economy and highlighted the weakness in exports," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Japanese investors had largely factored in a big fall in GDP, limiting losses after the data was released.

The Nikkei share average fell 0.4 percent. The yen rose against other major currencies despite the bad GDP data after the G7 financial chiefs made no specific mention of the strength of the Japanese currency.

In the United States, President Barack Obama will on Tuesday sign a $787 billion economic stimulus package which it is hoped will save or create 3.5 million jobs.

Administration officials said Obama would form a task force to oversee the restructuring of the ailing US auto industry.

General Motors Corp and Chrysler LLC are due to submit new turnaround plans by Tuesday showing they can be made viable again after receiving $13.4 billion in emergency aid from the former Bush administration last year.