TOKYO, May 16 - Japan's economy slowed to a standstill in the first quarter of 2003 as exports stalled ahead of the war in Iraq, leaving a year-long recovery on thin ice and underscoring concerns that the global economy is stagnating. Gross domestic product, the value of all goods and services produced in the economy, was unchanged from the previous quarter, the Cabinet Office said on Friday, just avoiding a contraction after four straight quarters of solid but slowing growth.
The figure was in line with a poll forecast of zero growth and down from the previous quarter's 0.5 percent growth, suggesting the world's second-largest economy was struggling even before the impact on trade of the SARS virus and a stronger yen. "The economy is on the brink of recession," said Jesper Koll, chief economist at Merrill Lynch Japan Securities. "The peak growth rate was 1.8 percent in April-June last year. The drivers of that growth were an export boost and a pick-up in capital expenditure. Both these engines are now stalling."
Exports took 0.2 percent off GDP in the quarter, a big swing from the plus 0.3 percent of the previous quarter, raising worries that the economy's main prop had been kicked away. Growth in spending by firms also slowed to 1.9 percent from 3.0 percent, although it proved more resilient than economists had expected, while personal consumption -- the biggest chunk of the economy -- improved slightly to 0.3 percent.
The data confirm that all three of the world economy's major engines are sputtering as G7 finance ministers gather in France for a meeting. Several European economies, including Germany's, are flirting with recession and the United States is faring little better. The yen's jump to a two-year high of 115.30 yen to the dollar on Thursday promised to make life even harder for Japan's exporters and speculation was rife that Japan had intervened to drag it back to near 116.30 in Friday trading.
LIVING ON SAVINGS
Private consumption rose for the sixth straight quarter as consumers continued to defy falling wages and bleak job conditions by dipping into their ample savings to snap up the latest camera-equipped mobile phones and clothing. But with incomes falling, economists are concerned that this may falter, leaving the economy with few sources of growth. GDP for the fiscal year that ended on March 31 grew 1.6 percent over the previous year, beating the government's target of 0.9 percent, but on a nominal basis it was down 0.6 percent, showing that deflation kept a firm grip on the economy.
The 3.5 percent decline from a year earlier in the GDP deflator -- the broadest measure of deflation -- was the biggest drop ever, encouraging bond traders to push the five-year government bond yield to a record low of 0.185 percent. "The 3.5 percent drop is bad news," said Hiromichi Shirakawa, chief economist at UBS Warburg in Tokyo.
"It means corporate sales and profits, which are measured on a nominal basis, are under pressure and that asset prices won't rise. It is possible that we will see a vicious spiral where this eventually depresses the real growth rate again." The fragile economy is another headache for the government of Prime Minister Junichiro Koizumi, which has been focusing its efforts recently on lifting the stock market from 20-year lows. Koizumi's economics minister, Heizo Takenaka, said Friday's figures showed the government needed to redouble its efforts to get prices rising again. "While pursuing structural reform, we must also press on with efforts to end deflation," he told reporters. Despite the stock market's dismal performance, corporate profits have begun to pick up and some of those earnings are being used for investment, Friday's figures showed.
"Fortunately the conflict in Iraq was short-lived and one of the risk factors is out of the way," Yoshihide Muneki, chairman of the Japan Automobile Manufacturers Association, told reporters on Thursday. But the benefits of higher corporate profits are not feeding through to most people because much of the improvement has come from cost-cutting, including lower wages and job losses.//