TOKYO -- Defying official optimism, trillions of yen in government spending and other financial stimulants, Japan's economy showed its underlying weakness Monday in statistics that indicated a retreat back into recession during the final three months of 1999.
The Japanese Economic Planning Agency said that the gross domestic product -- the total output of goods and services in the economy, the world's second largest -- fell 1.4 percent in the October-through-December quarter.It was the second consecutive quarter of economic shrinkage, following a 1 percent decline from July through September. The back-to-back quarters of contraction put Japan officially back into the technical definition of a recession, extending a seesaw pattern of tentative recovery and pullback.
The October-December decline was the biggest since the economy fell 2 percent in the spring of 1997 and the third-largest quarterly decline since the end of World War II.
There had been some expectations that the October-December period would show a decline, as the flow of tax money for public works projects dwindled and consumers curtailed spending. The government had toned down its optimistic predictions in recent weeks as evidence grew that growth had stalled.
Even so, the magnitude of the decline was worse than even pessimistic forecasters had predicted.
The data showed that Japan is still facing great obstacles in recovering from its longest bout of anemic economic performance in the postwar years. The most vexing obstacle seems to be in persuading Japanese consumers to spend money. Many have resisted despite extremely low interest rates and other incentives.
Consumption, which accounts for 60 percent of economic activity here, fell 1.6 percent last quarter, and housing investment plummeted 5.8 percent. Winter bonuses that many Japanese households regard as a critical part of their income shrank, and a government-sponsored program to encourage home purchases expired.
Economists said the latest quarterly performance probably means that the economy will not meet the government's target of 0.6 percent growth in the fiscal year that ends on March 31, although Taichi Sakaiya, the head of the Economic Planning Agency, insisted that goal could still be achieved. "We think it is attainable," Sakaiya said. "We expect the economy to move in a fairly bright direction."
He said the government was preparing to improve its outlook for the economy in its monthly report, to be released on Friday, and might even declare an economic recovery in progress.
Rather than spurring optimism, though, his comments created suspicion. While most economists are predicting growth this quarter, the economy would have to expand by 2 percent or more for the government to achieve its estimate of 0.6 percent annual growth.
Even optimistic forecasters concede that will be difficult, but the ruling party is facing an election this year, which puts pressure on politicians to put forth the most promising picture possible. But given the broad skepticism about the government's estimates, investors are likely to regard the next set of numbers with some doubt. Indeed, the benchmark Nikkei index of 225 issues fell 2.84 percent Monday, dragging down other Asian markets.
"The guy responsible for producing the numbers is the same guy who has a political stake in how it comes out," said Robert Alan Feldman, chief economist at Morgan Stanley Dean Witter in Tokyo. "Statements like that don't do anything to increase the credibility of Japanese statistics; in fact, perhaps they work in the opposite direction."
As bad as Monday's figures were, they did not completely derail growth. Japan's economy grew 0.3 percent in 1999, meager indeed but still a comeback from a 2.8 percent decline in 1998.
Jesper Koll, chief economist at Merrill Lynch here, said the gross domestic product in the first quarter of this year could be up as much as 6 percent on an annualized basis. He is now predicting growth of 1.8 percent in the next fiscal year, ending in March 2001, compared with the government's preliminary projection of 2 percent growth for that period.
The Economic Planning Agency's data produced conflicting opinions, a hallmark of forecasting in Japan. "In my judgment, this is not a real recession," said Masaru Takagi, an economist at Meiji University. "It's only a temporary pause in the recovery."
Richard Katz, senior editor of the Oriental Economist, a newsletter published by Toyo Keizai, which tracks Japanese economic issues, had the opposite interpretation. "One year after the recovery is said to have begun," he said, "we are virtually right back where we started from. So you have to ask yourself whether January-through-June wasn't just a pause in a single recession that started in 1997."
Katz and some other economists are worried that the performance of Japan's economy this year will roughly mirror last year's, with two consecutive quarters of growth followed by two quarters of decline. "What this zigzag makes very clear is that when the government throws money at the economy, it grows, and when it doesn't throw money at the economy, it ceases to grow," Katz said. "That's been the history of Japan for the past five years."
The government in general, and Finance Minister Kiichi Miyazawa in particular, have said they will not need to introduce a supplemental spending bill this year. A record budget of 85 trillion yen -- $8 trillion at current exchange rates -- was just passed, one loaded with public works projects, small-business credit guarantees and programs to stimulate housing investment.
While that set a record, it would represent a decline in public spending of 4.5 percent from the previous fiscal year -- when Parliament passed one of the largest supplemental budgets ever -- unless a new supplemental budget is indeed introduced and adopted. Many economists are already saying that the economy will need another dollop of spending lest it risk repeating the two-quarters-of-growth, two-quarters-of-contraction pattern of 1999.
"They took a gamble last June, saying they didn't need a supplemental budget," Katz said, "and then the economy fell off the table."
With an election looming, there is likely to be more talk of a supplemental budget package after the Golden Week holiday in May, when politicians go back to their home constituencies.
There are some signs emerging, too, that private businesses have been spending more money, which could diminish the need for further public spending as an economic stimulant.
Capital investment by businesses rose by an astonishingly robust 4.6 percent in the October-December period, far better than most economists had anticipated. The sharp rise suggested that executives are feeling more optimistic about future prospects.
Corporate profit also improved sharply in the fourth quarter of last year, bounding ahead 41.8 percent on a pretax basis to the biggest increase in two decades, according to Finance Ministry data released last week. Earnings of those companies tied to the new economy -- those specializing in information technology and telecommunications -- were especially promising.