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Yen Falls After Report Shows Japanese Economy Enters Recession

Feb. 16 (Bloomberg) -- The yen weakened against the dollar after a government report showed Japan's economy shrank in the final quarter of 2004, throwing the country into recession.

The economy contracted 0.1 percent from the third quarter, the government said. It compared with expected growth of 0.1 percent, according to the median forecast in a Bloomberg survey. Diminished expectations for economic expansion may undermine the yen by sapping demand for Japan's shares.

The yen fell as far as 104.65 per dollar after the data. It traded at 104.59 at 9 a.m. in Tokyo from 104.41 late yesterday in New York, according to EBS, an electronic currency-dealing system. The currency fell as far as 136.25 per euro, from 136.01.

The result ``certainly indicates significant weakness in the economy,'' said Uwe Parpart, a senior currency strategist in Hong Kong at Bank of America Corp., before the report's release. That ``will help the dollar significantly'' against the yen, he said.

Parpart said the yen may weaken to 106 per dollar by June 30.

On Dec. 8, the day Japan said its economy grew less than expected in the third quarter and exports rose at the slowest in more than a year, the yen lost one percent against the dollar as traders speculated Japan would sell yen to weaken its currency.

Japan sold a record 32.9 trillion yen ($320 billion) in the year through March 31 to stem gains in its currency. A stronger yen can make Japan's exports less competitive.

The Nikkei 225 Stock Average has gained about 1.4 percent this year. Investors from outside Japan have been net buyers of Japanese stocks for the past 16 weeks, according to finance ministry statistics.

The U.S. economy may have expanded at a 3.5 percent annual pace in the fourth quarter, quickening from a 3.1 percent clip in the third quarter, according to the median forecast in a Bloomberg survey. The U.S. releases fourth quarter data on Feb. 25.

Declines in the dollar may resume amid speculation a record U.S. current-account deficit will undermine demand for the currency. The deficit reached $164.7 billion in the third quarter.

A widening gap contributed to dollar declines in the past three years, as it means more dollars need to be converted into other currencies to pay for imports.

Japan Falls Into Recession as 4th-Qtr GDP Shrinks (Update2)

Feb. 16 (Bloomberg) -- Japan's gross domestic product unexpectedly shrank in the three months ended Dec. 31, throwing the world's second-largest economy into a recession.

The economy contracted at an annual 0.5 percent pace, the Cabinet Office said in a report in Tokyo today. The economy also shrank in the previous two quarters, revised figures showed. The median forecast of 27 economists surveyed by Bloomberg News was for a 0.7 percent pace of growth in the fourth quarter.

Sony Corp., Hoya Corp. and Citizen Watch Co. have cut profit forecasts because of slowing global demand for products including flat-panel displays and digital cameras. Companies are keeping costs down by putting a lid on wages, damping the consumer spending that makes up half of the world's second-largest economy.

``Consumption really isn't going to be strong enough to help drive growth,'' Eishi Yokoyama, an economist at AIG Global Investment Corp., said before the report.

The yen was at 104.68 to the dollar at 9:19 a.m. in Tokyo from 104.41 late yesterday in New York. Benchmark 10-year bonds rose, pushing the yield down 3 basis points to 1.42 percent. A basis point is 0.01 percentage point.

For all of 2004, the economy grew 2.6 percent in real terms from the previous year. Japan's growth last year compares with the 4.4 percent expansion in the U.S. and a 2 percent increase in the economy of the dozen countries sharing the euro.

The contraction is a setback for efforts by Bank of Japan Governor Toshihiko Fukui to end more than six years of falling prices. Fukui and his fellow policy makers tomorrow will probably keep rates close to zero, where they have been since March 2001, according to a Bloomberg News survey of economists.

Consumer spending, which accounts for more than half of Japan's economy, may not support growth as companies keep a lid on wages. Consumers may cut back further as the government of Prime Minister Junichiro Koizumi prepares to raise taxes and cut spending in a bid to curb the world's largest public debt.

Quarter-on-quarter, Japan's economy shrank 0.1 percent in the three months to Dec. 31.

Glut

A worldwide glut of computer chips used to build mobile phones and personal computers is taking a toll on earnings and sales of Japanese exporters. Overseas sales grew at the slowest pace in a year in December as customers in the U.S. and China, Japan's two largest markets, curbed orders.

Citizen Watch, a Japanese maker of watches and machine tools, said it may cut its annual sales and profit forecasts, because of shrinking demand for mobile phone parts and a drop in prices of watch mechanisms.

``The main reason is the adjustment in mobile phone-related production,'' Makoto Umehara, president of Citizen Watch, said in an interview broadcast this week.

Industrial production fell for the second straight quarter in the three months ended Dec. 31 as overseas demand faltered. When production last fell for two consecutive quarters, in 2001, the economy was in recession.

Chip Equipment

Hoya Corp., the world's largest supplier of glass plates used in products such as Apple Computer Inc.'s iPod portable music player, said profit growth slowed in the three months ended Dec. 31 and may slump further this quarter.

Sony, the world's second-largest consumer electronics maker, on Jan. 20 slashed its operating profit forecast by 31 percent to 110 billion yen ($1.05 billion), citing falling prices of digital products including flat-screen televisions and DVD recorders.

Worldwide chip sales in 2005 will increase 4.7 percent, slowing from a 24.4 percent gain in 2004, El Segundo, California- based researcher ISuppli Corp. said on Dec. 6, adding that growth in 2006 will drop to 2 percent.

The yen's 7.4 percent gain against the dollar last quarter has hurt the overseas earnings of exporters including Fuji Heavy Industries Ltd., the maker of Subaru-brand cars.

Still, companies including semiconductor-making maker Tokyo Electron Ltd. are predicting a rebound this year.

``The chip industry has gone into an adjustment period and that phase will probably see bottom sometime this summer,'' Terry Higashi, chairman of Tokyo Electron, said in a Feb. 14 interview.

Consumers

Machinery orders, a leading indicator of capital spending, rose 6 percent in the fourth quarter, and a government survey on Feb. 10 predicted a 9.9 percent increase in the first three months of 2005.

Spending by consumers has faltered as companies hire more part-time workers, who typically earn less and receive fewer benefits. Wages have fallen for 43 of the past 46 months, and the full-time labor force contracted for the seventh straight year in 2004.

``Consumption really isn't going to be strong enough to help drive growth,'' said Yokoyama of AIG Global Investment.

Seiyu Ltd., Japan's fourth-largest retailer, had a loss of about 12.3 billion yen in the year ended Dec. 31, three times more than its initial estimate, the company said on Jan 28.

Three tropical storms in the quarter depressed spending by keeping shoppers at home. October's Typhoon Tokage was the biggest to hit Japan in more than a decade.

Koizumi's drive to curb public debt may further reduce consumer spending this year as the government cancels construction projects and increases income taxes and pension contributions. The government predicts the public debt will rise to 151 percent of GDP by March 31 2006.

Koizumi's Liberal Democratic Party announced on Dec. 15 that the government will cut an income-tax rebate, currently as much as 290,000 yen per person, by half in January 2006. It plans to scrap the rest of the rebate a year later.