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Japanese Recession, Again

The economy of Japan, the world's second largest, officially entered a recession today as figures showed the gross domestic product contracting for a second consecutive quarter.

In the third quarter, which ended in September, the government said, the economy dropped 0.5 percent, or an annualized decline of 2.2 percent -- worse than the most recent decline in the United States.

Darkening the nation's outlook, the government also sharply shifted downward the second-quarter drop to 1.2 percent, from 0.7 percent, making for an annualized rate of 4.8. It also said personal consumption in the third quarter fell 1.7 percent.

With the figures released today, the world's two largest economies -- the United States and Japan -- are in recession. And Germany, the third largest, is expected to follow.

The data follow a procession of statistics that point to a hard winter in Japan. In the first half of this year, the flow of foreign direct investment into Japan contracted by 19 percent and corporate earnings slid by a third. And the trade surplus is forecast to drop 40 percent this fiscal year, which ends in March...

That assessment was echoed in New York by the Economic Cycle Research Institute, a private research group that studies 26 economic indicators for Japan, many dating back to the 1950's."They are set up to have their worst recession on record," Lakshman Achuthan, managing director of the institute, said in an interview on Thursday. "This one will beat the mid-1970's recession, and that one was related to the oil shock..."

Only four years ago, Japanese government bonds enjoyed the world's highest ratings. But in the last two weeks, the three major ratings agencies have downgraded Japan's government bonds to the lowest levels of the major industrialized countries.

Japan is largely immune to foreign investor nervousness about its bonds because it is a net creditor and because about 95 percent of the bonds are held by Japanese investors. But the downgradings expose a serious weakness of the Japanese economy.

In the 1990's, Japan's national debt more than doubled, but lowered interest rates have allowed debt service payments to hover around 10.4 trillion yen (now $8.5 billion) for the last 15 years. Today, however, tax receipts are shrinking, making borrowing increasingly costly.

Japanese government bond prices "are a ticking time bomb," David Roche, a London-based investment adviser, wrote recently, predicting that interest rates will rise and bond prices will fall, further eroding the weak assets of Japan's troubled banks.

If poor credit ratings cause interest rates to rise from their rock- bottom levels, Japan could start feeling the cost of a decade of heavy borrowing.

"If ratings go on skidding, it might trigger plunges in government bond prices, thus inducing a state of the economy similar to a depression," Hiroshi Okuda, chairman of the Japan Federation of Employers Associations, said on Wednesday.