Japan economy shrinks, recesssion looms

Japan'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 0.9 percent fall in GDP was in line with expectations, although a decline in capital expenditure was much steeper than forecast. Sony Corp and Panasonic Corp 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 annualized rate of decline of 3.5 percent, government data showed on Monday. While U.S. growth showed a modest pick up in the third quarter, Japan and the euro zone 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 19-20 meeting, shortly after the U.S. Federal Reserve is due to meet.

External demand accounted for 0.7 percentage points of July-September GDP contraction, matching the median projection. Japan's exports fell 5.0 percent in July-September, the biggest slide since a 6.0 percent 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 Motor Co.

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

Capital expenditure tumbled 3.2 percent, the fastest pace of decline since a 5.5 percent 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 29 percent in the year to March 2013 and Panasonic plans a 27 percent 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 Electronics and America's Apple Inc, and with a steady rise in the yen, which makes exports from Japan more expensive.

Analysts said Japanese companies face too many uncertainties to plan future spending with confidence and that is unlikely to change in the current quarter.

Resolving the protracted euro zone debt crisis is no nearer, U.S. tax increases and government spending cuts in early 2013 could tip America into recession unless Congress acts, and adding domestic uncertainty Japan's Prime Minister Yoshihiko Noda has promised to call a national election "soon" to break a political deadlock.

Masamichi Adachi, senior economist at JPMorgan Securities, said business investment would fall again in the fourth quarter as the global economy recovers only gradually.

"If some of these uncertainties are removed, it is possible for things to improve," Adachi said.

He forecast capital expenditure will fall 0.5 percent in October-December and then rise 0.7 percent in January-March.

Japan's economy outperformed most of its Group of Seven peers in the first half of this year on robust private consumption and spending for reconstruction following last year's earthquake.

But growth has stalled since then. Indeed, second-quarter growth was revised down in the latest figures by half to just 0.1 percent. The last quarterly economic contraction was in the Oct-Dec period of 2011, when GDP fell 0.3 percent.

With the economic affect of rebuilding from last year's earthquake and tsunami fading, the government acknowledged last week that its index of leading indicators gauge fell to a level suggesting the onset of a recession.

"I can not deny the possibility that Japan has fallen into a recession phase," Maehara told reporters after the data was released.

He said he expected the BOJ to pursue powerful policy easing, although in a speech BOJ head Shirakawa stressed that flooding markets with cash alone wouldn't inflation the economy when interest rates are near zero. The government should boost the economy's growth potential with deregulation and structural reform, he said.

"Exports and output are likely to remain weak, and domestic demand won't increase enough to make up for the weakness in exports," he said.

The BOJ set a 1 percent inflation target and eased policy in February. It followed up with further stimulus based on asset buying in April, September and October on mounting evidence the economy was on the cusp of a recession.

The euro zone is expected to report on Thursday that the economy shrank by 0.2 percent in the third quarter, extending a 0.2 percent contraction in the second quarter.

(Editing by Neil Fullick and Tomasz Janowski)