Japan Slides Into Recession, 1st Time Since 2001

Recession is back in Japan after a seven-year hiatus, and fingers this time are pointing outside the country as the latest global boom quickly deteriorates into bust.

Pedestrians are reflected on an electric market board in Tokyo, Monday, Nov. 17, 2008. The benchmark Nikkei 225 stock average fell in early trade.

(Katsumi Kasahara/AP Photo )

Government data Monday showed that the economy contracted at an annual pace of 0.4 percent in the July-September period after falling an annualized 3.7 percent in the second quarter. That means Japan, along with the 15-nation euro-zone, is now technically in a recession, commonly defined as two straight quarters of contraction.

Previous downturns, including the so-called lost decade of the 1990s, were largely self-inflicted, exacerbated by ineffective fiscal and monetary policies. But now more than ever, the fortunes of the world's second-largest economy rise and fall on the habits of consumers around the world.

Japan has long relied on exports of its cars and gadgets to fuel growth. However, the country's companies have had little choice in recent years but to expand aggressively overseas in the face of a shrinking home market.

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Between 2002 to 2007, Japan's gross domestic product grew an average 2.1 percent, of which 40 percent came from external demand, said Masamichi Adachi, an economist at JPMorgan Securities in Tokyo.

"Basically, the late 1990s were driven by Japan's own financial crisis," he said. "The financial system now is much more sound compared to the late 1990s and also relative to the U.S. or Europe. But the vulnerability (to external demand) is probably worse now than in the 1990s."

Indeed, Japan's economy has shed the excess labor, debt and capacity that hamstrung the economy in the 1990s. Corporate balance sheets are healthy, and banks weathered the subprime crisis with far smaller losses than their Western counterparts.

Glen Maguire, chief Asia economist at Societe Generale, describes the current recession as a "purely cyclical adjustment" as opposed to the "structural adjustments" of the 1990s.

"What we're starting to see is the extent of deterioration in external demand start to weigh more heavily on the Japanese economy," said Glen Maguire, chief Asia economist at Societe Generale. "And I think looking forward, there's every indication that dynamic is going to continue."