Japan's economy contracted more severely than expected in the quarter ended Sept. 30, dashing government and investor hopes that the once-vigorous nation had finally shaken off its eight-year malaise.
The Japanese government reported today that third-quarter gross domestic product--the nation's total output of goods and services--shrank 1.0 percent from the previous three months.
The downturn, a reversal from two quarters of solid growth, was considerably sharper than the 0.1 percent decline expected by private economists. On an annualized, seasonally adjusted basis, Japan, the world's second-largest economy and a key U.S. trade partner, suffered a staggering 3.8 percent drop.
Today's report provided fresh ammunition for skeptics in the high-stakes debate about whether the ailing Japanese economy is on the mend. "The clear message here is that Japan has lost momentum," declared Robert Alan Feldman, chief economist at Morgan Stanley Japan Ltd.
Feldman predicted the Japanese economy will shrink 1.3 percent in 2000; he is one of a number of high-profile Western analysts who have argued that a genuine recovery is still a long way off.
But Nikko Salomon Smith Barney economist Jeffrey Young, who is optimistic about Japan, said today's announcement did not shake his faith. He described the July-September figure as "part of a zigzag pattern around a rising trend."
"At the end of the day," Young said, "we're still talking about an economy that is growing by about 1 percent a year or slightly stronger and is on its way to growth of about 2 percent or slightly stronger."
Even the bulls, though, conceded that Japan isn't likely to post strong growth rates over the next three to six months and will be hard pressed to achieve Prime Minister Keizo Obuchi's growth target of 0.6 percent for the fiscal year ending March 31.
Experts cited a sharp falloff in public spending as a key reason for lackluster growth in the third quarter. The Japanese government has spent more than a trillion dollars over the past decade in an effort to pump up its economy, running up one of the highest debt-to-GDP ratios in the world. But the spending spree tapered off in the second half of this year. Public spending slipped 8.5 percent in July-September and is not expected to pick up again until early spring.
Meanwhile, the economy's other key growth engines also spluttered. Private consumption, which accounts for about three-fifths of Japan's GDP, shrank 0.3 percent in the third quarter. Capital investment by businesses, which makes up about 15 percent of the economy, sank 2.1 percent.
"Public demand has lost steam before domestic demand has taken over," said Kazutaka Kirishima, an economist with Sumitomo Life Research Institute.
Indeed, the only positive contribution to the economy in the quarter came from an increase in Japan's exports--a trend that, if it continues, is sure to grate on nerves in Washington during an election year.
Feldman argues that the persistent inability of Japan's policymakers to generate home-grown sources of economic demand dramatically reduces prospects that officials in the United States and Europe will respond to Tokyo's call for a coordinated effort to reverse the recent appreciation of the yen against their currencies.
"This is not a report that is going to be welcomed by foreign governments," Feldman said. "It makes it very difficult to imagine that the other industrial economies will be eager to cooperate with Japanese requests for intervention in the currency markets."
A strong yen hurts Japanese exporters by making it more difficult for them to offer competitive prices in overseas markets and by reducing the value of the profits when translated into yen.
The yen fell against the dollar after today's announcement. But the Japanese currency, which has gained steadily against the greenback all year, rallied in the afternoon to end the Tokyo trading day at 102 yen to the dollar, a gain of about half a yen from Friday.
The stock market also took the news in stride. The Nikkei average of 225 stocks rose 139.06 points, or 0.8 percent, to close at 18,507.20.
Economic data reported by the Japanese government tends to be more volatile than similar statistics in the United States. Several economists argued today that the low third-quarter figure was distorted by upward revisions to key measures of the economy's performance in the second quarter.
Even so, today's weak growth number is sure to put added pressure on Obuchi and his three-party governing coalition as they head into an election year. Analysts said the decline also sends an unmistakable warning to Japanese executives, some of whom have begun to back away from corporate restructuring programs as the economy showed signs of improvement.
Special correspondent Akiko Kashiwagi in Tokyo contributed to this report.