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Japan says econ may be in recession, outlook weak

TOKYO - Japan cut its view on the economy, dropping the word "recovery" for the first time in nearly five years, as high raw material costs and a global slowdown push the world's No.2 economy towards a recession.

The government said in its monthly report on Thursday that the economy was "weakening", an expression it last used in April 2001, when Japan was in a downturn.

"There's a possibility that the economy has entered a recession," said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office.

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.

Most economy watchers, including government officials, say Japan is either heading into such a downturn or is already there.

The government's gloomy prognosis came less than a week before second-quarter GDP figures that analysts forecast will show a contraction after three quarters of growth.

Core machinery orders fell much less than expected in June, suggesting capital spending may just be holding, data showed earlier in the day.

But with companies taking a hit from slowing U.S. growth and high crude oil prices, the manufacturers surveyed by the government forecast that machinery orders would decline in the third quarter, reinforcing the overall outlook for a downturn.

Machinery orders are a key indicator of companies' capital spending in the coming six to nine months.

Caution reigns

The government sounded a more cautious note than previously in its report, warning that the weakness would likely continue and dropping its forecast that the economy may recover moderately as the U.S. economy and exports picked up.

"Attention should be given to further downside risks that could stem from developments in the U.S. economy, the stock and (foreign) exchange market, and oil prices," said the Cabinet Office, which prepared the report.

Nishizaki said it would take more time for the government to judge whether Japan had entered a recession, but the downgrade suggested that the longest growth cycle since World War Two -- running 6-”years -- was finally coming to an end.

The government warned that both industrial output and exports, the main drivers of that long growth period, were weakening.

"With exports falling and corporate earnings not good, we're seeing negative factors for the outlook for capital expenditure," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Japan's economy will gradually continue to worsen at least for the rest of this year. The Bank of Japan is saying monetary conditions are still accommodative, but it won't be able to raise rates for quite a long time."

The central bank is expected to keep interest rates on hold at 0.5 percent when its policy board holds a two-day meeting from Aug. 18. Financial markets see little chance of a rate hike in the financial year to next March.

Preliminary gross domestic product data for April-June, due on Aug. 13, is expected to show that the economy contracted 0.6 percent, a Reuters poll showed.

The Cabinet Office said on Wednesday the economy was "deteriorating", adding that its provisional judgment was that Japan was likely in a recession, after an index of economic indicators sank in June.