Japan’s Economy Shrinks for 3rd Straight Quarter

TOKYO —  Japan’s economy shrunk for the third consecutive quarter, officially marking the longest recession in the postwar period, and it continues to contract, the government said Friday.

This latest data only underscored what most of the global financial community already knows: The world’s second-largest economy is in grim shape and getting worse. The 0.8% quarterly decline, or 3.3% on an annualized basis, included a contraction in virtually every sector of the economy.

This gloomy picture was darkened by Friday’s sharp 5.1% drop in Tokyo’s main stock index, the Nikkei-225, which ended the week at 13,916.98 amid continued political infighting over bank reform legislation.

“It’s crash helmet time,” said Andrew Shipley, economist with Schroders Japan Ltd. “It’s pretty scary stuff.”

Japan’s chief economic planner said it will be difficult for the economy to grow at all this year and that the “sense of crisis” about its fate is spreading.

“Japan is probably going through its darkest moment,” Taichi Sakaiya, the Economic Planning Agency’s director general, said after the agency released its report. “Tough times will continue. Tight lending has depressed consumer confidence and is hurting small companies more than anyone expected.”

Friday’s 0.8% drop in gross domestic product--the value of all goods and services produced in Japan--for the April-June quarter followed a 1.3% decline in the January-March period and a 0.4% drop for the prior quarter.

Stock markets across Asia fell as well Friday following Thursday’s 249-point drop in the Dow Jones industrial average, with South Korean shares declining 5.4% and Hong Kong’s skidding 3.5%. Investors seemed to be concerned with the allegations confronting President Clinton, which, if they lead to impeachment, could cause a global leadership vacuum and possible dissolution of the economic “Dream Team”--Treasury Secretary Robert Rubin and Federal Reserve Board Chairman Alan Greenspan.

Only two Japanese indicators seemed to show much sign of life Friday. The yen strengthened to as much as 128.80 to the dollar before settling at about 130.80 in late New York trading, from 134.23 on Thursday. The gain was attributed more to the dollar’s weakness than the yen’s strength. The other positive figure was monthly beer sales, which rose 3.5% in August.

As the gloom spreads, analysts are growing more concerned that Japan may be on the edge of a deflationary spiral, whereby prices and income spin downward, a situation not seen since the Great Depression of the 1930s.

A collapse in Japanese corporate sales on top of lower prices and personal income could push more companies to default on their loans, worsening the $620 billion-plus in bad debts already weighing down the banking sector.

“As of today, there’s no positive news at all,” said Tomoko Fuji, economist with Smith Barney Japan Ltd. “It’s a very dark situation.”

Central bank officials, meanwhile, told parliament Friday that their decision this week to reduce a key interest rate to a rock-bottom 0.25% from 0.45% should give a boost to Japanese banks with international operations, since they are facing growing difficulties borrowing money given their overhanging bad loans.

The central bank has vowed to purchase bank and corporate debt, if necessary, to inject more yen into the economy and help increase bank capital. It declined to set any purchase targets, however.

One irony of the Bank of Japan policy, however, says Chris Calderwood, chief economist with Jardine Fleming Securities Asia Ltd., is that the lower intrabank interest rate may help banks and large companies that raise funds directly in money markets, but it won’t help the “poor saps that borrow from banks.” These are often smaller companies hardest hit by the recession.

Another problem is that the recent strengthening in the yen could actually increase deflationary pressure, since it encourages imports. While these inflows would help other beleaguered Asian countries, the added competition would lead to lower prices in Japan.