Goldman Sachs Predicts Recession... in Japan

By Mike Caggeso
Associate Editor

It seems every analyst has chimed in on the possibility of a U.S. recession, but few have talked about the economic woes of the world's second-largest economy – Japan.

Until now, that is.

Goldman Sachs Group Inc. (GS) has cut it economic growth estimate for Japan's gross domestic product (GDP) from 1.2% to 1%, citing slowing growth in emerging markets and the country's lax economy. Odds that the country will enter a recession now stand at 50%.

"The probability of a recession in Japan has risen to the danger level," Tetsufumi Yamakawa, chief Japan economist at Goldman, said in a report to clients today. "We project weaker-than-expected growth in Japan."

And that's not surprising considering Japan's leading index, the Nikkei 225, has fallen in the past two years. In fact, the country is battling a host of challenges – falling economic sentiment, tepid wage growth and rising consumer prices.

The current U.S. slowdown has already weakened the economies of countries that export a significant share of goods here. And Japan is one of the biggest.

Japan's trade surplus with the United States shrank by 8.5% from last year to $6.53 billion (717.3 billion yen), as exports to the United States decreased 1.5% to $13.64 billion (1.5 trillion yen). Less construction machinery and fewer cars were shipped to the United States, an indication that the U.S. housing slump is spilling over into other economies.

"A U.S. slowdown affects Asia, beginning with China, and via that route it affects Japan," Japan's Economic and Fiscal Policy Minister Hiroko Ota, told Bloomberg. "The extent to which Japan is hurt depends on the severity of the U.S. slowdown."

Dual recessions in the world's two largest economies would sting every country in some way or another.

The Bank of Japan doesn't have much leeway to loosen money flow by cutting interest rates, as they are currently at a very low 0.5%. But Japan wasn't leaning in that direction anyway; previously, it contemplated raising rates last year, and Goldman believes the Bank of Japan will raise rates in the second quarter of 2009, Reuters reported.

"The greatest challenge for the Japanese economy, needless to say, is a recovery in personal consumption, which has remained in an extended slump," Goldman's Yamakawa said. "Innumerable obstacles stand in the way."

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