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Japan bankruptcies jump as economic gloom descends

TOKYO - Japan's corporate bankruptcies rose to their highest level in five years in July while sentiment among service sector workers fell to a nearly seven-year low, adding to a growing view that the world's second-largest economy is now in a recession.

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The gloomy data came a day after the government cut its view on the economy and suggested it may have entered a recession as high raw material costs and a global slowdown continued to bite.

Japan defines a recession as a downturn in the economic cycle, which varies from the more widely used definition of two straight quarters of economic contraction.

Corporate bankruptcies rose 12.9 percent in July from a year earlier to 1,372 cases, the highest number since July 2003, a research firm, Tokyo Shoko Research, said on Friday.

"Companies have endured rising raw materials costs so far, and now they have to face a rapid slowdown in both domestic and overseas economies," said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.

"The number of bankruptcies due to a recession is steadily increasing," Shimamine said, adding that Japan may have to wait until the second half of next year for the economy to recover.

Still, financial markets largely ignored Friday's data as most investors see little chance of a rate hike by the central bank in the fiscal year to next March.

The government is due to unveil preliminary gross domestic product data for April-June next Wednesday.

Analysts say the economy probably contracted 0.6 percent, ending three straight quarters of expansion on crumbling exports and consumption, a Reuters poll showed.

Companies have been feeling the pinch, too.

Failures among real estate and construction firms increased due to the impact of the U.S. subprime mortgage crisis and tighter construction rules in Japan, the bankruptcy survey showed.

Among such firms was property developer Zephyr Co, which filed on July 18 for court-led rehabilitation with about $893 million in debt, marking the largest failure of a listed firm in Japan in nearly five years.

A separate government survey of service sector workers, called "economy watchers" for their proximity to consumer and retail trends, showed that consumers were tightening their purse strings as energy and food prices have soared in recent months.

The index of service sector workers' views on current conditions fell in July to the lowest level since October 2001, and the Cabinet Office cut its assessment of the survey, saying economic conditions are severe.

Worsening consumer sentiment threats the outlook for personal consumption, which accounts for some 55 percent of economic activity.

"The purchasing power of households is falling in real terms as wages aren't growing but gasoline and food prices are rising," said Yoshimasa Maruyama, an economist at BNP Paribas.

"Companies likewise are feeling the effects of a double blow from high costs and slowing demand from overseas including emerging economies," he added.

The government and ruling coalition parties are hammering out the details of a package of economic steps to help consumers and small firms, including fisheries and farmers, cope with high oil and raw material costs.