BT: Goldman says 60% chance of Japan sliding into recession

Business Times - 29 Jan 2008

Goldman says 60% chance of Japan sliding into recession

Prediction comes as exports falter amid rising yen, weaker global demand

By ANTHONY ROWLEY IN TOKYO

THERE is now a 60 per cent chance that Japan's economy will slide into recession in the first half of this year, and the contraction may even have begun already, according to Goldman Sachs. The US investment bank's prediction comes as Japanese exports are faltering in the face of a rising yen and weakening global demand.

The Nikkei 225 stock average, meanwhile, slumped in value by nearly 4 per cent yesterday as another leading financial house, Macquarie Securities, warned of a decline in Japanese corporate profits in 2008. Bank of Japan governor Toshihiro Fukui linked the stock slide to the strong yen which hit around 106 to the dollar and also rose against other currencies.

Goldman Sachs pointed out in a research report that five out of 11 key government indicators that give an indication of which way the economy is going were already falling and if others followed, the economy was certain to have entered a recession.

Macquarie's chief economist, Richard Jerram, argued also in a research report that the economy should be able to avoid a technical recession in 2008 but downgraded the forecast for growth in the fiscal year beginning April 1 from 2.8 per cent to 2.1 per cent and said that 'large firms' profits could easily decline in fiscal year 2008'.

Darkening economic prospects saw the Nikkei shed 541.25 points to 13,087.91. Falls in Japanese stocks have been relatively bigger than those in other markets because of the yen's rise, BOJ governor Mr Fukui told a parliamentary committee. 'The rise in the yen, due to an unwinding of past (positions) based on the yen's weakness, is affecting Japanese stock prices,' he said.

Speculation is mounting that the BOJ may be forced to cut interest rates soon in order to take upward pressure off the yen and to avert or minimise the length of a recession in Japan. But data released last Friday showed that core consumer price inflation hit a near 10-year high in December, creating a dilemma for the central bank over which way it should move.

In an ominous sign that Chinese demand for Japanese raw materials is beginning to flag, as well as that in the United States, Nippon Steel Corporation, the world's second largest steelmaker, announced yesterday that its pre-tax profit in the nine months to December fell by 0.7 per cent, sending steel shares sharply lower and increasing pessimism in the broader market.