Japan output slump heralds deep downturn

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(Agencies)
Updated: 2008-11-28 16:55

Central banks slashed interest rates to get credit flowing again and governments have pledged trillions of dollars in bank bailouts, extra spending and tax cuts to kick-start their economies and avoid massive job losses as companies cut costs.

China's hefty 108 basis point rate cut earlier this week, the US Federal Reserve's $800 billion plan to rescue battered credit markets and hopes for a government bailout of US carmakers, helped lift world stocks to two-week highs this week.

A passerby walks past an advertisement board of Panasonic outside of an electronic shop in Tokyo November 27, 2008. Panasonic Corp cut its annual net profit forecast by 90 percent, hit by a slowing economy and a firmer yen, missing market expectations and joining rivals such as Sony Corp in slashing its outlook. [Agencies]

In Asia, markets extended gains heading for a sixth straight rise in trade subdued by the lack of cues from Wall Street. Japan's Nikkei ended 1.7 percent higher, even as investors dumped shares of Panasonic sending it tumbling 10.9 percent after it joined other electronics makers and cut its profit forecast. Shares in the rest of Asia Pacific were up 1.8 percent.

Long Contraction

But the Japanese data challenged the view of some investors that markets have already fully discounted the economic downturn scenario and it was time to pick up some bargains. Japanese government bond futures rose after the bleak numbers.

The yen, which tends to rise when investors scale back riskier investments, also held firm, adding to the woes to Japanese exporters such as Toyota, stung by a sharp slump in demand from key US and European markets.

Japan's industrial output fell 3.1 percent in October, more than expected, with a drop more than twice as big predicted for November, while household spending fell 3.8 percent from a year earlier, also more than expected.

Some economists saw Japan's economy shrinking for a full year, which would be the country's longest ever contraction.

This, coupled with declines in household spending and retail sales and cooling inflation, raised the prospect of the return of deflation, a vicious circle of falling prices feeding a drop in demand in anticipation of even more price cuts.

"Japan is getting closer to the status of deflation and the nation's economy will further deteriorate without doubt," said Masamichi Adachi, senior economist at JPMorgan Securities.

Finance Minister Shoichi Nakagawa called for Bank of Japan to take more action to avert such a scenario.

Japan tackled its last decade-long spell of deflation with a policy of massively inflating banks' balances with zero-interest cash, but analysts are divided whether the central bank is ready to drive its rates, now at 0.3 percent, to zero again.

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