Japan falls into third recession in a decade, but signs of optimism are still present



Last night’s announcement of a 3.7-percent drop in Japan’s first quarter annualized gross domestic product confirmed what many expected – that the country is in yet another recession, its third of the past decade.

The news was worse than expected, though, as economists had forecast a 1.9-percent drop in GDP in the first quarter. This followed a 3-percent drop in the fourth quarter of 2010. At 534.89 trillion yen, Japan’s economic output is at the smallest level since 1991.

The March earthquake, tsunami and nuclear disasters didn’t help. As Bank of Japan Governor Masaaki Shirakawa put it, Japan’s economy is in a severe condition of deflation and facing an even “more serious problem” of declining strength.

The BOJ has a quite easy monetary policy, and it is likely to remain unchanged after the central bank’s two-day meeting that ends Friday.

The Japanese yen weakened against most of its counterparts during Thursday’s morning trading and was on track to notch its fourth straight decline against the U.S. dollar.

But amid the bad news, there are signs that some of the pessimism in the business sector is turning around in anticipation of reconstruction spending.

The Reuters Tankan manufacturing sentiment index, a monthly survey that has a 95 percent correlation with the BOJ’s quarterly survey, is measured by subtracting the percentage of pessimistic responses from optimistic ones. This index, reflecting a survey from April 22 to May 13 of 216 big firms, rose four points from April to -9, after falling 28 points in April to a 14-month low.

The index for non-manufacturers climbed 11 points from April to -4, after sitting at an 11-month low last month.

In another Reuters poll, 41 percent of companies responded they had restored their production or ability to provide services to pre-quake levels. Last month, this number was 26 percent.

Although the economy is anticipated to contract again in the second quarter, growth is expected to return in the third quarter. The Organization for Economic Cooperation and Development said that it expected “the negative short-term impact on economic output [to] be followed by a rebound as reconstruction spending picks up.”

The group cut its growth forecast for the year to 0.8 percent last month, after originally forecasting 1.7 percent growth for the year.

In terms of sovereign debt, U.S. rating agencies are maintaining negative outlooks. Since a downgrade in April from “stable” to “negative,” Standard & Poor’s has kept its outlook on Japan at AA-minus for the long term and A-1-plus for the short term.

Moody’s Investors Service is also maintaining a negative outlook on Japan’s sovereign debt at Aa2.

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